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Should We Have Been Investing in the Country, Instead?
In September, the Wall Street Journal published an article about nervous investors who were buying low yield, short term U.S. Treasury Bills as safe securities. ("Demand for Short-Term Treasury Debt Puts a Crimp in World-Wide Supply")
I remembered that because I just read another article about nervous investors buying government securities at low yields, under 1 percent. This time it is the Washington Post writing about the low yield U.S. Treasury bonds and declaring that "it's terrible news for the economy, which relies on people's willingness to invest and lend money." ("Flight to U.S. Treasury Bonds Bad News for Economy")
Others in the financial world are quoted. One said "The simplest way to think about this is that nobody wants to hold any risky assets." Another said, "You can cut rates all you want, but if nobody wants to take risk, no matter how attractive an investment seems to be, no one will put up the capital for it."
But wait a minute. Buying government bonds is investing and lending money. Consider the wreckage of the last few months after a decade of mortgage lenders making billions of sub prime mortgage loans.
Investment houses like Bear-Stearns and Lehman Brothers risked billions of America's loanable funds and our savings speculating with sub prime mortgages, and it did nothing except give them a chance to resell financial assets at a higher price.
Our savings could have helped fund our massive Federal deficit. Instead we owe foreign nationals who bought U.S. Treasury Bills and Bonds while Americans were on a speculative spree buying up risky assets that have failed by the billion.
We want our savings to fund the production of long lived assets and valuable services. The private sector has failed to do that lately.
Government bonds earned 4 to 5 percent interest for the last 10 years. If we had invested more in the government and government had used our savings and rebuilt New Orleans we would have something to show for it and thousands of jobs in the process.
The past decade has proved in the most decisive fashion that Americans are ready to take risks and to lend and invest money, but there is nothing that makes private lending and private debt better than public lending and public debt. It all depends on the assets we buy.
Remember one rule: it is not who invests, but in what.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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The Violent Demise of the U.S. Dollar
"Your premium brand had better be delivering something special, or it's not going to get the business." — Warren Buffett
The U.S. Dollar is the premium brand of currency in the world. It's the standard against which all other currencies are measured and it's where the money goes when people want rock-solid security.
This has been true for decades, but in the last 35 years, the U.S. has gone from the largest creditor nation to the largest debtor. Our twin deficits combined with artificially low interest rates have left us with a $10 trillion national debt — $50 trillion if entitlement programs are included, as they should be.
We haven't been spending the money on factories or production. Instead we've been buying houses, cars, HDTV's, playing world cop, and dramatically overpaying for health care.
To put it bluntly, we are broke, both as a nation and as a set of individuals. The dirty secret is that our lifestyle of the last 20 years is unsustainable.
Why Saving, Not Spending is the Key
To fix this mess we've made, we need to tighten our belts and start saving money rather than borrowing to spend. That goes both for individuals and the government. In addition, we need to focus on producing goods that can be exported to other nations so that we can get money flowing back into this country rather than out of it.
Unfortunately, the government is determined to sustain consumption epidemic. Certainly consumption brings short-term pain relief, but it just makes the long-term imbalance worse, similar to giving a crack addict more crack to avoid withdrawal.
People keep saying the the bailouts will be paid for by our children, but the truth is that we'll have to pay the price ourselves. If the government continues its spending spree, which is even more likely now that we'll have a unified government of Democrats, inflation risk is very real.
Standard & Poor has already stated that the U.S. is at risk of losing its AAA bond rating.
If the dollar devaluation prediction comes true, the new financial capital of the world will be Asia. Asian countries have been effectively taxing themselves to subsidize U.S. consumption by buying and holding our bonds and thereby keeping our currency valuable.
If the U.S. economy collapses, Asia will decouple and begin to flourish on its own. They will be in excellent position with industrialized production, steady growth, and plenty of reserve savings.
What Happens if the Dollar Falls Apart?
If the U.S. dollar declined to 1/2, 1/4 or even 1/10th of its current value, chaos would ensue and a great number of people would be in deep trouble, especially retirees.
Are you prepared for such a contingency? Any bonds you hold would decline in value significantly, as would any cash.
According to the government numbers, inflation was around 4% this year, which means that any cash you had in a high-interest savings account has actually been declining in value at 1% rather than increasing by 3%.
If we're headed for dollar deflation, as some say, then it's a good idea to keep your cash. If you believe the inflation scenario, then you should buy some commodities such as gold. Or of course you could hedge your position and buy some gold while also keeping some cash on hand.
If you do decide to buy gold, it's a good idea to avoid futures and stick with real, physical gold or a fund that holds physical gold to avoid counterparty risk of the futures not being delivered.
If you want to take more risk and attempt to profit off the possibility of a falling dollar rather than simply maintaining your wealth, buy mining companies rather than physical gold, but still don't buy futures.
As for equities, Asia is a solid long-term investment but it will suffer in the short term along with the rest of the world.
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Using Prosper to Diversify in a Down Market
Everywhere you go, you hear that the stock market is tanking — and analysts are discussing what you should do to keep more of your money.
While my philosophy of index investing says to buy more when stock prices are low, I came across a guy using an additional method to get returns on his money: peer-to-peer lending at Prosper.com.
We've talked a little bit about Prosper before, but if you're new to it, the site allows users to make and borrow loans from other individuals at agreed-upon interest rates.
So if you've got some extra cash, you can bid on loans as part of or as the entire amount that a borrower is looking for. With interest rates as high as 35%, it's an attractive alternative to watching your money tank in the stock market.
Have you considered loaning out money at Prosper? Share your experiences with us in a comment.
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How Much Money Do I Need to Retire? ING Your Number
ING Direct is rolling out a new advertising campaign and Web site focused on determining how much money you need to retire.
ING Your Number (http://www.ingyournumber.com) is a financial calculator for figuring out "your number" — meaning, the amount of money you need to live at a level you'd like in retirement.
On the Web site, you're given a Flash presentation where you insert six fundamentals for determining your number:
- Current Age
- Marriage Status
- Household Income
- Expected Retirement Age
- Desired Income at Retirement
- Age until you'll need the incomeAfter your number is determined, ING points you to financial professionals whether you have one or you don't.
At first use, it seems helpful — you've got to know where you're going before you can get there. But at the same time, how are you supposed to know how much you'll need to live on in retirement? (It may not be the 80% often quoted.)
And, more importantly, how can I figure out when I'm going to die? (Death clocks not withstanding)
Now that ING owns ShareBuilder, it makes sense for them to be making a bigger deal out of investing for the future. We'll see how long the "your number" campaign plays out.
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What Are Your Favorite Personal Finance Books?
Open thread: what are your favorite personal finance books?
I'll start it off. Two of mine are:
The Bogleheads' Guide to Investing got me started on the path to index investing, helping me realize that there is no way to long-term successfully beat the market. It preaches paying low fees and going along for the ride, rather than trying to actively outperform benchmarks.
The Automatic Millionaire taught me about paying yourself first and automating savings and investing. When you're automatically socking money away, you're increasing your net worth without even thinking about it.
Share your thoughts. What are your favorite personal finance books?
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If This Isn't Gambling, I Don't Know What Is
Trent at the Simple Dollar posited to his readers last week that investing in individual stocks is basically gambling.
Individual stock investing is something like playing blackjack at a casino where, on every hand, the dealer is wagering just a little tiny bit more than you, but there are thousands of people around you shouting out suggestions.
He argues that you might have a slight advantage (his italics), but being profitable is "far from a guarantee and the work needed to get those earnings is tremendous."
Obviously, the fools at The Motley Fool feel otherwise. In their story on how to get 50% annual returns, here's what they suggest:
Lesson 1: Sell your index fund
There is no surer way to not beat the index than by investing in the index itself. Not exactly a revelation, right? Investing in index funds leads to nearly certain long-run underperformance, because of transaction costs and management fees.Putting aside the preposterous proposition of actually getting 50% returns (which they admit), are they actually arguing that transaction costs and management fees are the downfall of index funds?
That doesn't make any sense. Index funds are great because, in addition to owning an entire index, they're passively managed and have some of the lowest fees in the market.
I actually met Tim Hanson, one of the authors of the article, when I interviewed at the Motley Fool (full disclosure: they didn't offer me the job because they were "going to give priority to candidates with more experience in investing." — aka stock picking).
I told him index funds were my investments of choice, and while he agreed they are the right way to go for 80% of investors, the Fool recommends an "index-plus" approach … meaning, invest in an index fund and buy the stocks they are hocking in their newsletters (because that's what they're really selling you).
Not only are they suggesting ways to get almost impossible 50% returns, but they're spreading disinformation in the process.
Please remember to think about who benefits from the "advice" you get.
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Investing in Education: How Much It Pays
There are several ways to estimate returns on investments in education. One way is to compare wages between jobs using general workforce skills with jobs that need college degree skills.
Compare wages for a certified teacher with a college degree to wages for a teaching assistant, for example.
Another way converts college tuition and expenses into an estimate of a minimum wage or minimum salary increase that will make college a paying investment. The process requires interest calculations because money paid for college tuition and expenses could be used to buy stocks and bonds or other interest earning assets.
Tuition and expenses amounts to an investment in a higher paying job, even though college students may want to go to college for other reasons.
Suppose in-state tuition at public college is $6,000 per year each year for four years. In some states like North Carolina, the state tuition is reported as $3,886, while in others like Michigan it is $7,115. Some are above and some are below, but let's use $6,000 as a representative tuition for 2007.
In the first year, $6,000 invested in stocks and bonds would earn interest or dividends. Similarly in the second year, except $12,000 would be invested and the second year earns interest or dividends on $12,000.
At the end of four years at the time of graduation, the principal invested and the interest earned is a total amount, which will equal $27,230.82 at 5 percent interest.
The principal amount of $27,230.82 earning 5 percent interest over the next 10 years and compounding monthly will be equal to $44,849.42. Start at graduation and $288.82 of extra income each month over the next 10 years using 5 percent interest will also be the same $44,848.63.
The $288.82 equals the minimum extra monthly earnings necessary to pay for a college education at an interest rate of 5 percent. Using a forty-hour week and 160 hours a month, it is less than $2.00 an hour of extra wage and salary that pays for college.
Nothing is a guarantee — but expect college to pay.
Our thanks for these calculations go to the built-in spreadsheet functions on MS Excel. Experiment yourself.
Use the Excel help file under FV, which is the future value function. The spreadsheet entries above are =FV(.05/12,120,0,-27230.82,1) and =FV(.05/12,120,-288.82,0,0).
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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What Kind of Person is the Stock Market?
Stanley Bing has an amusing post up today about the qualities of the stock market and how they translate into a person.
Among them, he offers up:
Rich: There’s a lot of money in the stock market. Having all that money doesn’t really make it any happier, though.
Nervous: In fact, being so wealthy and privileged makes it incredibly anxious. If peace of mind rests in the feeling that one has nothing to lose, the Market is the exact opposite. It has everything to lose, first and foremost in its anxious, monkey mind.
Greedy: Over-riding that anxiety is a fine patina of opportunism and atavistic desire to get more, have more, to profit while others are screaming down into the ocean of defeat. When the greed overcomes the nervousness, the Market is happy and flies very high;
Gutless: On the other hand, even the specter of a shadow of a doubt that things could go the other way and the Market starts heading for the exit. In a disaster, this is not the person you want in the lifeboat with you. If it doesn’t push you overboard, it will try to eat your leg;
Intelligent: Nobody is saying the Market is stupid. It’s not. It’s just like a lot of my friends — too crazy to be smart a lot of the time;
Irrational: I don’t care how many PowerPoint presentations investment bankers, lawyers and security analysts offer to me at boondoggles past, present and future, nobody will ever convince me that the Market is rational. Buffett to the rescue! Hurrah! Let’s go up! Oooh. Wait. Buffett’s motives are impure. Ouch. Let’s go down. Sure, apologists for the Market will come up with a million reasons it does things. So do we all.
Of course it's possible to beat the market. It can be done, and it has been done.
But the more important question: is it worth it? What will it cost you to beat the market?
I don't know about you, but I don't have the time or money to try and beat the market. The chances of it happening are slim, and even if it happens, it'll cost you the difference in fees.
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Digg Tackles 401(k)s: Why The Dow Drop Doesn't Matter
While the mainstream media is all over the place with news of the stock market's big drop Thursday, the community at social news site Digg isn't worried.
Check out some of the right-on-the-money comments from this story: Have any money in a 401(k)? You just lost a huge chunk.
cause letting it sit under my matress is so much better. It can take a dunk considering its been steady going up for the last five years.
The market will come back eventually. Now is actually the perfect time to BUY! Buy cheap sell high, and live below your means, you will retire well.
the title has nothing to do with the article. the whole point of a 401k is longterm investment for your retirement. one crappy period in the span of the 40 years until you retire really isn't worth losing any sleep over
These comments are encouraging, especially when the mainstream media is so focused on the stock market's fall.
Now, one could argue that Digg users tend to be younger than most mainstream media consumers, therefore have a longer time to go before they retire.
But it's really good to see smart personal finance fundamentals spread.
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Money Management is Simple: Don't Listen to the Noise
I like to read (and sometimes answer) the questions on LinkedIn (add me to your network) every so often, especially in the personal finance and Web development categories.
The other day, I ran into a great question with some not-so-great answers.
Money Management: They teach in school that best way to generate returns from capital is through proper money management. What is your money management method? How do you ensure that you are employing your savings profitably? What are the best ways to protect investments from market crash and along with saving taxes?
This question goes to the heart of managing your money.
How do you save? How do you ensure you're getting good returns on your money? How do you prepare yourself for highs and lows in the markets?
As is usually the case with LinkedIn questions, the people providing the answers are the ones hoping to make some money off of the question. There's nothing inherently wrong with that, but (as often happens) the answerers are providing poor information in hopes of making a buck.
Check out these answers.
From a Capital Market Professional: "I am afraid there is no direct answer. But there are mitigation possibilities. If you find the equity market has gone over board from medium / long term point of view, start moving moneys to fixed return investments (basically debts-deposits, etc)."
From a Manager Product Marketing: "Not having any investments takes away the sorrow of having to protect it. So I would say that proper money management is to spend it."
From the Owner of a Personal Wealth Management company: "Wealth Management - my thoughts though influenced by U.S. laws (eg. tax statues) are universal: [LINK TO WEBSITE]"
These aren't bad answers, per se, but none of them are truly helpful.
Money management isn't hard, and if you know the basics, you don't need to listen to the noise. Here's my answer to the question.
There are tried-and-true, easy ways to properly manage your money. You don't need to pay for someone to tell you these.
1) Spend less than you earn.
2) Pay yourself first.
3) Automate your payments and savings/retirement contributions.
4) Invest in index funds.
5) Diversify your investments — stock funds, bond funds and int'l funds.
6) Stick with it. Don't time the market.On a side note, make sure you're getting the most from your checking/savings account. FDIC-insured online accounts often yield much higher interest rates than brick and mortars.
Most of these people are out there to make a buck off of you, but you don't have to be afraid of managing your own money. In fact, once you get the fundamentals down, you can even purchase investments that outperform the "professionals."
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