Investment Advice or, why the Wall Street Journal makes me crazy

 

Front page of the first issue of The Wall Stre...

Really, I don’t know why I subscribe at all. Except, maybe, that it wakes me up better than two stiff mugs of French Roast. Here’s why:

  1. The editorial and op-ed pages make me chew the scenery. Aaaargh, I could live with the relentlessly right wing editorials and the tired Milton Friedman economics. After all, it’s Murdoch’s paper. But Op-Ed is supposed to provide alternative views, ya know? Like a think tank other than the Hoover Institute or the American Enterprise? Like maybe Brookings? The last time I saw an author from Brookings I was so surprised I spewed my coffee on the page and had to read it online.
  2. It’s relentlessly downbeat. I mean, there’s NEVER positive news. Great jobs data? Well, it ONLY improved X%. 75% of people will pay less for health care? Headline is: 25% of [the richest] people will pay more. Consumer confidence up? Oh yeah, those guys must be reading USA Today.
  3. They have never once published a flattering picture of Barack Obama. When I worked in Washington, my organization’s lobbyist used to make a hobby of photographing members of Congress biting sandwiches. (He started out with photos of them picking their noses, but gave it up as too easy to get.) The pictures he had of our eminent legislators baring their fangs adorned a whole wall of our offices.  But seriously, couldn’t they get a decent picture once a year of our Prez? After all, it must be a challenge to get a photo of Mitch McConnell that doesn’t look like a fly just went up his nose, and they’ve managed that. According to WSJ, Barack Obama has never, ever done a single thing right in his entire life, much less the presidency. And Michelle only appears when she’s spending money.
  4. The proofreading is terrible.

But now for the top reason, and the point of the post:

5.   No matter what investment you’ve made, it’s the wrong one at the wrong time. For years I’ve been reading about the demise of the bond market, the crisis in TIPS, how great gold is, emerging markets up, emerging markets down. Listen to this and you can be sure of one thing—the fat cat traders and bankers that support WSJ will make plenty of dough off the trading costs of churning your account. And here’s some headline news: Investments Go Up and Down.

For an awfully long time I kept reading how it was dangerous to invest because who knew how low stocks could go? Then it was, Europe is down the tubes. Now it’s TIPS that will be tanking forever. That’s why you hold an appropriate asset market basket—some will always be “going down” while others are “going up”—or at least tanking less if we’re talking about 2008-2009. And yes, right after you invest some of them will take a turn south—it’s inevitable. You’re balancing risk with reward, and it’s average total return over the long term, not this month or this quarter. Want to benefit from the wisdom of WSJ? Go read Jonathan Clements’ book The Little Book of Main Street Money. He used to be their personal finance columnist.

And my advice? Stick to the last section. They have pretty good drink recipes and book reviews.

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A Tisket, a tasket, a windfall in my basket

 

Jackpot

Jackpot (Photo credit: pirate johnny)

A lot of people daydream about winning the lottery, even those of us who never buy a ticket. But like many windfalls, lottery winners often have had a hard time holding on to it. Before we shake our heads at them, let’s see if we’re without sin. Have you held on to your tax refund (which you shouldn’t be getting if you’ve planned correctly, but that’s another matter)? How about that $50 you got as a rebate? The work bonus? An inheritance? Your most recent raise? Ahem.

Wealth is not what you make, it’s what you manage to hold on to. It’s the rare person who dreams about a windfall and thinks to themselves, boy, I can’t wait to invest that! If so, my guess is your profession is either 1) financial planner or 2) actuary. But let’s say you’re a normal person, what should you do? Of course, it depends on the amount (really, $50 is a little different than $500,000), but here’s my advice:

 1.    If it’s a large amount, park it in an on-line savings account, or CD, or some other safe place for at least 3 months until you get used to the idea. What’s a large amount? Anything where your first thought is OMG. You need time to calm down and think straight.

 2.    AT A MINIMUM, save half. Ideally, I’d like to see you save 50%, pay off debts with 40%, and spend no more than 10%. If you don’t have any debts, I’m okay with that 40% going to a long term, needed goal (kid’s education, home repairs, etc.). I’d still rather see you invest it.

 Then what?

I’d do the following, in the following order. If one is already complete, move on to the next. This applies whether it’s $50 or $50,000. (Legal disclaimer: please see a professional who can advise on your individual situation. The following is intended as general guidelines only, and no specific recommendations are intended.)

  • Create or top off your emergency fund so that it’s at least 3 months’ worth of living expenses. Better if it’s 6 months.
  •  Pay off consumer debt. DON’T pay off unless you have an emergency fund, or when the next emergency happens, you’ll just put it on the credit card. This is an ideal method to never get out of debt
  • Invest in a IRA or Roth if you’re eligible
  • If you’re not eligible, invest at least the same amount in mutual funds (or, preferably, that 50%) so you build an investment nest egg.
  • If you still have some of that 40% left, pay off student loans. No student loans? Pay down the principal of your mortgage.
  • Invest in yourself. Get some decent, fee-only advice from someone who won’t sell you a bunch of crap, get savvy tax advice, and nail a good estate attorney to update your documents. Once you’ve got a reliable team working for you, get more education—I don’t care if it’s knitting or an MBA, knowledge is something no one can take away from you, no matter what the market. Consider career counseling. Ignore no-money-down seminars for buying real estate, day trading schemes, and all the other garbage that makes money for the seminar leaders and no one else.
  •  Invest. Educate yourself so you know what you’re doing, and only invest when you understand the reasons for the investment, how you will make money, and what the costs are.
  • Give something to charity. You’ll feel way better about yourself. If you live in the U.S., you’re already wealthier than most of the world. Check out Peter Singer’s website for guidelines on reasonable giving.
  • Make improvements to your home, but only if it will increase the value or repair something that’s really falling apart. This would NOT include a hot tub, pool, or Sub-zero refrigerator.
  • Blow a little. A LITTLE! Max 10%
  • Maybe consider the pleas of your deadbeat relatives.

So now I’ve covered how you should spend your tax refund, your raise, and the money you inherited from your aunt in Azerbaijan. Call me if you win the lottery. In fact, maybe you should call me even if you don’t! And, good luck!

 

 

 

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Three simple steps to wealth

 

Three-legged joined stool

Just because it’s simple doesn’t mean it’s easy. The solution to nearly all money problems is quite simple:

  1.    Spend less
  2.    Earn more
  3.    Invest the surplus

The devil’s in the details. Often, people with financial difficulties are in fact very good at least one of these, but they don’t take into account the other two.

First, there’s the very frugal type. If you’ve ever been mocked for the latte factor (pinching pennies by carrying your own coffee rather than Starbucks’), that would be you. You squirrel it away, have a budget, research every purchase, and pay off your credit cards every month (if you use them at all). You’re an expert at living on less. I love it. The danger here is that you’re so focused on not spending that you forget to invest properly, which inevitably involves some risk—something that frugal people often hate. Or, you’re so focused on steadiness that you overlook the big wins in income that can be generated by pursuing a better job or a significant raise.

Earning more, however, is not necessarily a sure ticket to wealth. Wealth is how much you hold on to, not how much money has slipped through your fingers. People with large salaries in highly visible or status oriented jobs are not necessarily rich—especially if they spend a lot on toys, travel, transportation,  or the (seemingly inevitable) McMansion. Also, people in high earning jobs also find themselves under quite a bit of stress, and the urge to make it up to yourself with rewards is hard to resist. This group needs to remember that there’s a particular kind of satisfaction in a 6 or 7 figure investment portfolio as well.

Group number three: okay, you earn more than you spend, and you’re hardly more extravagant than a nun. Where is your surplus parked? In CDs? No! With a stockbroker, fee-based “advisor”, wrap account…? AAARRRGGGHHH! You owe it to your hard work to educate yourself. Investment scams and schemes can cost you way more than you’ll save in years of frugality or even earnings. Really, the hour a week you spend reading financial books or articles may earn (or save) you more per hour than any other action you can take to preserve and increase your wealth.

In fact, these three principles could as easily apply to our national economic woes as much as our personal financial management. If only…

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