Wednesday, December 19, 2012

Want to Save More? Automate and Simplify!

I have some new numbers on an old problem, the emergency fund. We all know that we need to set aside something for a rainy day. The financial gurus recommend that we have between three months and eight months take home salary in something like a bank account or a money market fund. How many Americans actually have that kind of cushion against the slings and arrows of outrageous fortune? From the Winter 2012 edition of Charles Schwab onInvesting:

28% Have No Emergency Fund
21% Have Less Than 3 Months in an Emergency Fund
17% Have 3 to 5 Months in an Emergency Fund
25% Have 6 Months of More
9% Declined to Answer

I have seen and reported on numbers that are worse than those seen in this survey. Why don’t people do a better job preparing for both the known unknowns, (when will I need to buy another car), let alone the unknown unknowns like hurricane Sandy? Sheena Iyengar has studied the human decision making process. She has discovered there are four keys to making better decisions. I will add one more to that list.

The first key to saving for a better future is automation. Set up an automatic debit on your checking account that goes straight into savings. If you never see that money, as with a pretax deduction for a 401K, it is even better. A one time decision takes the burden off your memory and puts at least a little money out of harm’s way every week or every month. If you do not yet have a bank account, that is no excuse. The envelope system used by your great grandparents will work just fine. Every time you receive some money, put a predetermined amount in an envelope, preferably that envelope should then be locked in a box.

Sheena Iyengar has discovered that too many choices results in paralysis. There are thousands of individual stocks and mutual funds out there. Which one do I choose? Her studies indicate more fund choice in a 401K program actually lowers participation. People, afraid to make the wrong choice make no choice even if they know they are harming their own future.

Her next recommendation is concretize your decision making process. The more vivid the consequences of a decision, the more likely you will make a good decision; asking the participants in a 401K to write down a couple of benefits of saving money for retirement on the plan application form dramatically increased participation.

Categorize! Humans deal with choosing categories, then making particular selections better than confronting complexity. Stores have discovered that people confronted with 300 magazines in an unorganized rack seldom make a decision. If the magazines on the racks are clearly separated by category, people are more likely to buy. I would zero in on the financial section, maybe travel if planning a vacation, or pro football in the late summer.

Finally condition for complexity; in a study of purchasing a new car, Sheena Iyengar discovered the customer would become more engaged in the sales process if first presented with a simple choice, a four cylinder engine or a V-6 then with the more complex choices culminating in choosing between something like 56 different color combinations. If the sequence was reversed it is easy to lose the customer.

How does this work. Once you have that emergency fund in place, start simple. Start with something you understand. I understand the concept of an integrated oil company. They sell gasoline. I buy the stuff every week. Oil companies make a lot of money in good times and in bad, so one of my first stock purchases was Chevron. In my mind, at that time it was either Chevron or Exxon, a simple choice. My wife went through a similar process choosing Johnson & Johnson. She likes their products and trusts the company.

For picking mutual funds or exchange traded funds start with a fund family or a category depending on your situation. For example if you are heading from the general to the particular, Vanguard is the unchallenged king of low cost funds. Fidelity is also a well respected fund family with a wide variety of options. If heading from the particular to the general, say an emerging market exchange traded fund, just do a Google search then dig into the particulars of each offering, especially sales load and total fees.

Picking funds for your 401K can be a little more complex. If you can’t deal with complexity consider a life cycle fund that invests in a balance of stocks and bonds their managers think appropriate for your age. As you learn more, you can begin to make your own decisions as to particular funds and fund mix.

So there you have it. Go and do it. Getting started is the hardest choice. Once you learn that it works, increasing your savings rate and making more complex financial decisions will, surprisingly, seem very easy and natural.

1)Automate Your Savings Process
2)Cut the Number of Choices
3)Make it Real
5)Condition Yourself for Increasing Complexity

Monday, December 17, 2012

Another Look At The Golden Rule

Matthew 7:12 (King James Version)

“Therefore all things whatsoever ye would that men should do to you, do ye even so to them: for this is the law and the prophets.”

We all know that this is the old truth. Similar statements are found in every major religious tradition on earth.

But why?

“Six degrees of separation is the idea that everyone is approximately six or fewer steps away, by way of introduction, from any other person in the world, so that a chain of "a friend of a friend" statements can be made, on average, to connect any two people in six steps. It was originally set out by Frigyes Karinthy and popularized by a play written by John Guare.” (Wikipedia) Mathematicians question the veracity of this proposition, but the principle is true. We live in a remarkable interconnected universe. All of us are tied to one another in ways we can’t imagine. Perhaps, we should consider that when we offer loving kindness and compassion to another we just might be giving a gift to ourselves.

There is no way that we can predict how some respectful consideration of another might trigger an unlikely series of events that ends in a miracle. Consider the story of Naaman (2nd Kings Chapter 5). Naaman was the commander of the Syrian army, a highly respected very successful general, but he had leprosy, a horrible incurable death sentence. In his house he had a servant girl, a slave captured in a raid against her people Israel. This young woman told her master that there was a prophet of God living in Samaria who could cure his leprosy. I am sure by that time Naaman had consulted the best doctors in his country, maybe even a fortuneteller or the priests of his religion. He was just desperate enough to listen to a servant.

Not wanting to start a war, Naaman sent a letter to the King of Israel before he went down to meet with Elisha, the prophet of God. The King of Israel was terrified that this request to cure the incurable was a pretext to start a war. He tore his garments in despair, but Elisha told the King send him on down so that he will know there is a prophet in Israel.

When he arrived at the house of Elisha, the prophet did not answer the door. He sent a servant with a message. Naaman was instructed “Go, wash yourself seven times in the Jordan, and your flesh will be restored and you will be cleansed.”

This annoyed the general. He noted that Syria had better rivers than the Jordan. He was about to leave when one of his soldiers counseled him, “My father, if the prophet had told you to do some great thing, would you not have done it? How much more, then, when he tells you, ‘Wash and be cleansed’!”

Of course Naaman obeyed the prophet. When he came out of the Jordan River the seventh time he was healed. Three times the mighty general considered the counsel of slaves and servants with the same respect that is normally only given to the wise or the mighty.

The fact is you just don’t know who has that particular piece of information you need to change your life. You don’t know how a chance meeting can trigger a series of events that could result in your blessing. “In chaos theory, the butterfly effect is the sensitive dependence on initial conditions, where a small change at one place in a deterministic nonlinear system can result in large differences to a later state.” (Wikipedia) Folks we live in just such a nonlinear system.

The Golden Rule is not limited to those who can obviously benefit us or even those we consider below us in this material world. It also applies to the energy vampires, people who have the ability to drive us wild with their peculiarities. There is another old truth that covers this situation that is found in Matthew 5:41, “If anyone forces you to go one mile, go with them two miles.” Before you ask the question, the text doesn’t say 22 miles. Most of the time when confronted with energy vampires, I can’t make it through the first mile, let alone the second mile.

Does this work in real life? When I was looking for a job in research and development back in 1985 I met a woman at a job fair representing my current employer. She was a low ranking personnel functionary who ran the disability program at the laboratory. For a junior design project our team designed and built an all terrain electric wheelchair for a little crippled girl. It was a success. We even made the local TV news. Our professor was happy with us, but I heard the Dean of the Engineering College dismissed us as a bunch of garage mechanics. I used photographs of our device in my pitch to prospective employers. This young woman thought that our project was pretty cool. She bypassed all the normal bureaucratic nonsense required to get a Government job, putting me in immediate contact with the men who actually had the power to hire me. I was given three job offers! Let me add that about six months after starting work at the laboratory I received one of those form letters from our personnel office telling me that while they were amazed with my remarkable abilities and accomplishments they had no openings at this time for someone of my remarkable talents. 27 years later I still have that letter.

Jeff Bezos is the founder, chief executive officer, president and chairman of the board of, a man with an estimated net worth of $20.2 billion dollars. Recently he delivered the commencement address at Princeton University. During most of this 12 minute speech, one of the most powerful men in our country told a story from his childhood. He was an exceptionally bright child with an unusual aptitude for math. He disliked his grandmother’s cigarette smoking, so one day while riding in the car with his grandparents he calculated how many years cigarettes had cut from his grandmother’s life expectancy. When he announced this fact, his grandmother burst into tears. His grandfather pulled the car off the road. The old man stepped out of the car asking his grandson to join him. Jeff did not know if he was going to be praised for his intellectual accomplishment or punished for its effect on his grandmother. His grandfather told him, “Jeff, one day you’ll understand that it’s harder to be kind than clever.”

Many years later Jeff Bezos ended a lecture to a group of the most intelligent and academically successful young people with a series of questions. One of these questions was, “Will you be clever at the expense of others, or will you be kind.”

Matthew 25:

34 “Then the King will say to those on his right, ‘Come, you who are blessed by my Father; take your inheritance, the kingdom prepared for you since the creation of the world. 35 For I was hungry and you gave me something to eat, I was thirsty and you gave me something to drink, I was a stranger and you invited me in, 36 I needed clothes and you clothed me, I was sick and you looked after me, I was in prison and you came to visit me.’

37 “Then the righteous will answer him, ‘Lord, when did we see you hungry and feed you, or thirsty and give you something to drink? 38 When did we see you a stranger and invite you in, or needing clothes and clothe you? 39 When did we see you sick or in prison and go to visit you?’

40 “The King will reply, ‘Truly I tell you, whatever you did for one of the least of these brothers and sisters of mine, you did for me.’

The concept for this blog post has been shamelessly taken from a sermon by Joel Osteen, America’s preacher and the Princeton commencement address delivered by Jeff Bezos, a man who changed the way the world goes shopping. The links are below.

Joel Osteen’s Gate Keeper Sermon

Jeff Bezos Commencement Address

Saturday, December 15, 2012

888-995-HOPE (4673)

This is not the kind of thing you will usually see in this blog. My presupposition is that through good decisions, hard work, and persistence you can change your life. But sometimes things happen. Hard working, clean living, perfectly wonderful people lose their jobs or can no longer work due to accident, illness or situations totally beyond their control. Then what?

If this sort of misfortune befalls your family, take action quickly. List your monthly expenses, especially your monthly payments. Ditch anything that is not absolutely necessary, like cable TV. Contact your creditors, especially the bank that holds your mortgage. Negotiate new terms on your own if you can. Be sure and document every call thoroughly and completely. Always ask for a written confirmation of your phone conversation with these representatives. I always prefer face to face over phone if that is possible.

The key here is survival. Protect what Dave Ramsey calls the four walls, your house, your utilities, food and clothing for your family, and a car. Notice I said a car not the car. It might be time to trade those monthly payments for a paid for clunker.

If you can’t reach a mutually acceptable resolution with your bank to keep your home, there are options other than foreclosure, including a short sale. Short sales are not a perfect solution. There are also Government programs that are designed to help you hold on to your house. Start with Making Home Affordable.Gov. 888-995-HOPE (4673)

Making Home Affordable
This website contains good information on a wide variety of available programs and how to begin your journey on what will be a time consuming and complicated process.

They also provide some general educational material including this list of common scams.

1. Beware of anyone who asks you to pay a fee in exchange for counseling services or the modification of a delinquent loan.
2. Beware of people who pressure you to sign papers immediately or who try to convince you that they can "save" your home if you sign or transfer over the deed to your house.
3. Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
4. Never make a mortgage payment to anyone other than your mortgage company without their approval.

Look for qualified guidance sooner rather than later. The National Foundation for Credit Counseling provides certification for nonprofit credit and mortgage counselors. This service isn’t free but their charges are considered nominal. It is a good place to start if you find yourself in financial trouble.

The National Foundation for Credit Counseling
If serious financial problems overtake you find properly qualified professional help so that you can take action as soon as possible. Do not wait. And please, don’t try to live on your credit cards. No one ever got out of a hole by digging a deeper hole.

Thursday, December 13, 2012

Guess What? You Are Not In Charge.

The Fiscal Cliff is coming. Or not. Maybe the Mayans knew that Nibiru, planet X is destined to hit the earth on December 21, 2012 ending my hopes for a comfortable retirement. Or not. Whatever may or may not happen, the best I can do are those things that God and common sense dictate as wisdom. Ultimately, man is not in control of his own destiny, much less that of the entire world. Our leaders can not be assured that their plans for the economy will work for even a day, let alone a ridiculously short period of time, like a thousand years.

I asked my broker a simple question. How will my dividends be taxed if we go over the fiscal cliff? I have heard contradictory reports on how dividends will be treated, given my new lower income in retirement. His answer straight from their legislative office, “Nobody knows.”

Later on that afternoon my broker gave me a call. Bottom line, “Nobody knows.” Nobody knows what kind of a deal Congress will negotiate with the President. Nobody knows how the large institutional investors who drive the market will respond to the Congress and the President. He added something that hadn’t occurred to me, lawsuits. Special interest attorneys are already preparing to sue in Federal Court over anything that comes out of the negotiations. I also expect lobbyists are working overtime to prepare for any and all possible contingencies.

I watch the financial press. It seems to vacillate between ostrich like optimism and hysterical panic depending on the purpose of the publication or the show. The big boys are clearly pessimistic. They are even borrowing money, yes borrowing money, at today’s low interest rates to pay their shareholders special dividends before the tax increase hits. I watch the genius investors like Soros and Buffett call for higher taxes on the rich. Interesting, almost all of their “income” is not classified as earned income by the IRS. It is classified as capital gains. Therefore it is taxed at a much lower rate. Anybody hear them calling for a new law to tax capital gains as regular income?

Then there is the law of unintended consequences. Engineers call these reactions, second order effects. The world economy is an incomprehensibly complex interconnected system. An input at one point will change the outcome at every other point in the system, sometimes in dramatically unpredictable ways. Recently Maryland enacted a special millionaire tax on high earners. The result, millionaires left the state. The amount of revenue collected from that tax bracket actually dropped as a result of a tax increase. It is now clear that the restaurant industry is cutting their number of full time employees in preparation for the oncoming impact of the Patient Protection and Affordable Care Act (PPACA). Employees working less than 30 hours a week are not covered by this act. Who knows what effects any budget compromise might cause as its impact ripples through the economy?

So what am I doing? I am at the low end of my range for stock holdings. Last time I checked, about 42% of my holdings (excluding real estate) are in stocks. The rest I have placed in bonds, bond funds, cash, or near cash (money market mutual funds). I have some plans on how to proceed, if things break this way of that. But ultimately it is all in God’s hands.

Quote by Mikhail Bulgakov from the Master and Margarita, one of my favorite novels.

“– But here is a question that is troubling me: if there is no God, then, one may ask, who governs human life and, in general, the whole order of things on earth?
– Man governs it himself, – Homeless angrily hastened to reply to this admittedly none-too-clear question.
– Pardon me, – the stranger responded gently, – but in order to govern, one needs, after all, to have a precise plan for a certain, at least somewhat decent, length of time. Allow me to ask you, then, how can man govern, if he is not only deprived of the opportunity of making a plan for at least some ridiculously short period, well, say, a thousand years , but cannot even vouch for his own tomorrow?

Wednesday, December 12, 2012

Downsize or Supersize?

Sometimes I think reporters write articles just to start an argument, thereby generating reader interest. Anne Tergesen of the Wall Street Journal recently questioned conventional wisdom with an article entitled, “Everybody Says You Should Downsize. Everybody May Be Wrong.”

For generations young people get married and have children. As these “household formation units” grow they accumulate stuff to house, clothe, and feed a growing family. As mom and dad grow older they earn more money, allowing them to buy the accoutrements of the good life, expensive furniture, big SUVs, boats, and giant TVs. Then the children move away to college or real life leaving the parents with a big house filled with stuff. As they drift towards retirement they begin to think about downsizing. Do two people really need a four bedroom house? We have two sets of everyday china and two sets of fine china. How many plates do two people need? Until the real estate bubble of 2006, the increasing value of a primary residence was a significant part of a retirement plan. People moved to areas where there were jobs after graduation from high school or college. These areas tend to have high real estate prices and high taxes. In retirement conventional wisdom dictated that a couple sell the big house in the expensive area and move to a smaller house in an inexpensive area or even into an apartment. The capital gains generated by the sale of their house was then added to their income producing assets to help support an important part of the American Dream, “retirement with dignity.”

There are the obvious reasons for not following this path. If your house has crashed in value past the point where its sale would generate enough revenue to justify the cost (including the emotional costs) of relocation, it makes more sense to stay put until the market recovers. In some cities, Detroit comes to mind, there is no point in waiting for a recovery. However, in suburban Washington I believe that patient money invested in single family homes will not go unrewarded. I really don’t think the Federal Government is going to become smaller or less important in the foreseeable future.

I have always loved big yards with lots of trees, but to be perfectly honest, yard work never amused me all that much. Today, I can no longer do the climbing necessary to trim branches or trim the 8 foot hedge that stood in front of my house for over 25 years. Even walking behind a lawnmower requires a break or two before the yard is finished. Does mom really want to clean all those empty rooms for the rest of her life? Can she? When we move I don’t plan on doing any more yard work. Will I really be willing to pay someone else to do something I can still do myself?

Then there is the stuff. After 25 years in the same house we have accumulated a lot of stuff. We don’t use half of it on anything like a regular basis. In addition readers of this blog know that after my mother in law’s death we put all her stuff into a storage unit. My mother in law managed to pack most of the stuff from a three bedroom house into a two bedroom apartment. Now we have two mountains of stuff. It isn’t just stuff. It is stuff chained to memories of a lifetime. It is easy for me to tell my wife, “Don’t even open that box of photographs. Just throw it away,” but that isn’t going to happen. Recently we spent a week living in a hotel near that storage unit trying to figure out what to do with a mountain of stuff. It isn’t easy. We finished about 1/3 of what needs to be done. My wife wants some of her mother’s stuff. Our house is at the point where topology is an issue. The mathematics of space has determined that for every new piece of furniture added to our house a piece of furniture must be removed.

Until this conundrum is resolved the storage unit costs the estate $188 a month.

Anne Tergesen observes, “In recent years, new breeds of professionals have sprung up to help people declutter, organize and move their possessions. Among their recommendations: sort your belongings a little at a time so you don't get overwhelmed; don't make judgments about what your spouse should or should not keep; and take only what fits your current lifestyle.” We are actually using the services of such a professional and her partner. This woman handled moving my mother in laws possessions into storage and is arranging estate sales to dispose of the more valuable material we neither need nor want.

One of these advisors, Ann Bass of Asheville, N.C. recommends that your new house gives both husband and wife some personal space for their personal stuff and their hobbies. The old joke says that in retirement a wife gets twice the husband and half the money. Psychologists state that the first year of retirement is the second most stressful year of a marriage after the first year following the birth of the first child. Plan on providing personal space for both the husband and wife to store their tools and to pursue their hobbies in your retirement home, unless you really like to fight. A woman we know proposed moving from a one story house to a two story retirement home so she would have a place to store a huge collection of children’s books she has accumulated over a lifetime (really). Mercifully, at least in this case, sanity prevailed.

I don’t expect that we will be able to downsize. I will be relieved if we can avoid supersizing our new home to contain all the stuff that my wife would like to retain. I would encourage my readers, especially young couples that life does not consist in an abundance of possessions. What is really important can’t be weighed or measured. Those things are held in your heart or your arms.

Luke 12: (NIV)

13 Someone in the crowd said to him, “Teacher, tell my brother to divide the inheritance with me.”

14 Jesus replied, “Man, who appointed me a judge or an arbiter between you?” 15 Then he said to them, “Watch out! Be on your guard against all kinds of greed; life does not consist in an abundance of possessions.”

16 And he told them this parable: “The ground of a certain rich man yielded an abundant harvest. 17 He thought to himself, ‘What shall I do? I have no place to store my crops.’

18 “Then he said, ‘This is what I’ll do. I will tear down my barns and build bigger ones, and there I will store my surplus grain. 19 And I’ll say to myself, “You have plenty of grain laid up for many years. Take life easy; eat, drink and be merry.”

20 “But God said to him, ‘You fool! This very night your life will be demanded from you. Then who will get what you have prepared for yourself?’

21 “This is how it will be with whoever stores up things for themselves but is not rich toward God.”

Monday, December 10, 2012

Ethical Investing

According to an article published by the Motley Fool, the number one best possible single stock investment of the last 50 years would be the cigarette powerhouse, Altria Group (ticker symbol MO). It has returned a stunning average 20.5% a year since 1968. That would have turned your $1,000 investment into $3,700,000 in fewer than 50 years. I don’t own any Altria stock. My wife is not comfortable profiting from a product that turns its customers into addicts then slowly kills them off. I would not invest in anything that grieved her conscience even if I believe it to be a really good idea. I think tobacco products are a legal as well as a traditional part of American culture. I don’t smoke; in my blog I recommend you don’t smoke for financial reasons, but if you want to smoke, I consider it your business.

I believe a company has a moral obligation to serve three groups customers, shareholders, and employees. I also believe they have an obligation to obey the law of the countries where their operations are located.

I haven’t invested in companies like Microsoft and Walmart because something about their business model makes me queasy. I consider Microsoft a classic 19th century predatory monopoly. Many of their products have not been all that good. They don’t take care of their customers. Microsoft eliminates innovative competitors by making crude copies of their products, then packaging them at a low cost into the Windows Operating System or by buying their competitor’s company. Their use of large numbers of “permanent temporary” employees bothers me. They haven’t treated their shareholders (other than insiders with stock options) all that well since the dotcom crash of 2000.

Walmart really is a two edged sword. On the one hand no retailer in history has done more to provide the best possible value to the largest number of customers. On the other hand the appearance of a Walmart on the edge of town has the same effect on local small business as a nuclear weapon. Walmart has consistently provided their shareholders with more than respectable returns. But then the value Walmart has provided to customer and investor alike has been at the expense of their employees and their suppliers’ employees. I seldom shop at Walmart; to be honest in part because it is not convenient. I have never invested in Walmart, as I question some of their business practices. However, I hope that someday Walmart will offer the same level of benefit to their employees as they do to the customers and investors they have served so well.

If ethical investing is really an issue in your mind there are 150 mutual funds and 17 exchange traded funds that will screen tobacco, alcohol, weapon systems, or environmentally offensive companies out of your life. There are funds for conservative Christians, environmentalists, and even Moslem fundamentalists. Normally, these funds underperform their competition. This is not surprising since the universe of acceptable investments is smaller for funds with a conscience.

The following information is from “The 7 Top Funds for Ethical Investing by Thomas Anderson.

Kiplinger reports that the best of these funds over recent history are Amana Income and Amana Growth. Over the last five years they rank in the top 1% of all funds in their respective categories. These funds invest according to Islamic principles, no pork, pornography, gambling, or alcohol. In the past year they have not done all that well since they do not invest in financial firms that are involved in usury. They invest a lot of their money in health care companies.

If you are big fan of alternative energy, check out Portfolio 21. They are really serious about ecologically safe and sustainable products. They are also opposed to the use of nuclear power to address global warming. As you might expect, they like companies that produce wind turbines. They also invest a lot of money in health care.

If you don’t like alcohol, gambling, pornography, tobacco, or weapons you might like the Appleseed Fund. They seek “ethical” bargains and keep about 8% of their portfolio in gold to protect their investors against high inflation they see in our future. Over the last three years the Appleseed fund has topped the S&P 500 by 12% per year. Not too shabby.

Christianity is a religion of freedom and grace, not a religion of rules and regulations. If a particular investment bothers your conscience, don’t buy it. If your brother has no problem investing in that same company extend him the grace to follow his own conscience. Don’t be too proud of your own righteous behavior. If you have a 401K, investments in an index fund, or any kind of a managed account, the chances are pretty good you own some minuscule speck of something you would find offensive.

Romans 14: (NIV)

Accept the one whose faith is weak, without quarreling over disputable matters. 2 One person’s faith allows them to eat anything, but another, whose faith is weak, eats only vegetables. 3 The one who eats everything must not treat with contempt the one who does not, and the one who does not eat everything must not judge the one who does, for God has accepted them. 4 Who are you to judge someone else’s servant? To their own master, servants stand or fall. And they will stand, for the Lord is able to make them stand.

5 One person considers one day more sacred than another; another considers every day alike. Each of them should be fully convinced in their own mind. 6 Whoever regards one day as special does so to the Lord. Whoever eats meat does so to the Lord, for they give thanks to God; and whoever abstains does so to the Lord and gives thanks to God. 7 For none of us lives for ourselves alone, and none of us dies for ourselves alone. 8 If we live, we live for the Lord; and if we die, we die for the Lord. So, whether we live or die, we belong to the Lord. 9 For this very reason, Christ died and returned to life so that he might be the Lord of both the dead and the living.

10 You, then, why do you judge your brother or sister? Or why do you treat them with contempt? For we will all stand before God’s judgment seat.

Saturday, December 8, 2012

"Bah!" said Scrooge, "Humbug!"

Maybe I am not the best person in the world to write a Christmas post. I come from a family that through a consciously negotiated pact refrains from giving gifts beyond immediate family. My wife comes from a family where people buy gifts for other family members to give out on Christmas so they (the person spending the money) will not feel guilty about the moral failure of their offspring or sibling. For most of our married life Christmas sparked off at least one really ugly argument. Finally we reached the point where we understood just about how far we could push these issues without a major explosion. Now we are both pretty unhappy with most Christmases, but neither one of us is too unhappy at the other’s expense.

We all read the stories, “Woman Trampled to Death at Walmart.” It starts on Black Friday with millions of Americans standing in line for hours to save $50 on a tablet PC; children raising guilt manipulation to an art form to receive the latest overprice piece of plastic junk they saw on TV; mothers on the verge of a nervous breakdown because they can’t give their family the perfect Norman Rockwell Christmas complete with a gourmet seven course meal. Let’s not even consider people losing their jobs over drunken performances given at the office Christmas party or the huge increase in the number of suicides committed during the holiday season.

For heaven’s sake, if there is anything that requires a budget summit between husband and wife, it is Christmas. Have all your arguments finished months before the advent (a pun) of Black Friday. Under no circumstances borrow money to fund Christmas. In olden times, banks offered Christmas Club Accounts. Every week during the course of the year, money was deposited in these accounts to assure enough funding for the family Christmas. Even though such things haven’t been offered for years, maybe you could start an account for funding the Christmas budget on January 1.

Don’t give Christmas gifts to people for whom it would be difficult to reciprocate in kind with the exception of children, of course. It is no favor. The Japanese have a word for this burden O-Kaeshi (translated honorable return). In Japan once you have received a gift you are obligated to give one in return. It starts a complicated cycle of guilt driven giving, based on the social standings of the participants relative to one another. This practice is quite totally insane. The people spending the money need the money and the people receiving don’t need or perhaps don’t even want the gift.

The true spirit of giving is captured in the classic O’ Henry short story, “The Gift of the Magi.” Most of us read it grade school, but if you haven’t read it, I won’t spoil it for you. If this doesn’t bring a tear to your eye, you need to work on your heart.

The Gift of the Magi
Ratchet everything down a bit.

That dinner doesn’t need to be all that extravagant and expensive or perfect. If you are that worried about impressing someone else, don’t invite them.

You don’t need to go into debt to buy a $500 I-Phone for a twelve year old child.

Find ways to teach your children and yourself about the true spirit of Christmas over the course of the holiday season. Since Christmas is a celebration of the birth of Jesus Christ, perhaps his story and his Church might be a good place to start. The first Christmas gift was Jesus. He is the Lamb of God given to us for our salvation and that we may live with him forever.

The first gifts given to celebrate his birth were given by the Magi. These gifts were treasures given by kings to the Son of God. Go thou and do likewise. Give something extra to the works of God this month.

The Bible teaches that our savior is an advocate for the needy. Perhaps this is a good time to give to ministries that care for the poor or maybe you could donate an hour of your time to a homeless shelter during this season. Remember, your children are watching you. What you do is a hundred times more important than what you say.

Give something of yourself that doesn’t require a lot of money. Give someone a sheet of homemade chocolate chip cookies instead of a senseless gift. If you are good with your hands make a Christmas ornament for someone’s tree.

The greatest gift that you can give someone who really loves you is your time. Spend time with those you love creating memories and traditions that will make you all better people.

From the movie the “How the Grinch Stole Christmas”

The Grinch: It came without ribbons. It came without tags. It came without packages, boxes, or bags.
Narrator: The the Grinch thought of something he hadn't before.
The Grinch: Maybe Christmas doesn't come from a store. Maybe Christmas...
Narrator: He thought
The Grinch: ...means a little bit more.

The First Sunday in Advent

The Collect.

ALMIGHTY God, give us grace that we may cast away the works of darkness, and put upon us the armour of light, now in the time of this mortal life, in which thy Son Jesus Christ came to visit us in great humility; that in the last day, when he shall come again in his glorious majesty to judge both the quick and the dead, we may rise to the life immortal, through him who liveth and reigneth with thee and the Holy Ghost, now and ever. Amen.

Thursday, December 6, 2012

Casino Capitalism and The Las Vegas Line

The idea of a casino intrigues me. Why would anyone go to play games at a place where they are absolutely guaranteed to lose money? Slot machines are computer controlled to pay out about ninety cents on the dollar, or less depending on the casino. Slot machines obviously require no skill, but what about bets that the casino can’t control, like those placed on the outcome of football games? I remember how fascinating it was to discover that Las Vegas sports books do not bet their money on anything as stupid and unpredictable as football games. Las Vegas bookmakers try to set the line so that exactly the same number of dollars are bet on each team. The casinos are quite content with the 9% or 10% they take from the gamblers for providing this service. If too much action is falling to one team, they will change the line to attract money to the other team. Back in the old days, handicappers who messed up the line and lost too much of their casino’s money were given one way rides into the desert in the trunk of a Lincoln Continental. The casinos are not gambling with their money. They are letting you gamble with your money.

Just for grins I looked up the line on the upcoming Army Navy game. Here is how it is presented.

Navy -7 (-115)
Army +7 (-105)

Translation: In order to win a bet on Navy, the midshipmen must score at least 8 points more than the cadets of West Point. The second number in parentheses means that in order to walk away with $200 in your pocket, you must place $115 at risk. If you win the casino keeps that extra $15.

If you wish to win a bet on Army your team needs to lose the game by no more than 6 points. Obviously if the teams tie or Army upsets Navy (an unlikely outcome) you will win your bet. The second number in parentheses means that in order to walk away with $100 in winnings you only need to place $105 at risk. If you win the casino is happy to keep your $5.

What happens if the Navy scores exactly 7 points more than Army? That is called a push. In theory it would mean that the casino should return all the bets placed on that game. Obviously that isn’t going to happen. Some casinos set the line with ½ points to make sure it can’t happen. Some casinos specify the push goes to either the winning or losing team. They are in business to make money.

The Las Vegas line represents the collective wisdom of every gambler in the world. Even though picking winners of football games requires a measure of skill, it also contains a measure of luck. It is difficult for anyone to beat the line over an extended period of time. In the aggregate, the entire universe of sports gamblers will lose 10% of their money over the course of a season. The casino will take this 10%, even though the gamblers are the people supplying all the money and accepting all the risk.

What does this have to do with anything sensible?

Consider financial vehicles such as mutual funds and variable annuities. The mutual fund does not place any of its own money at risk. It is gambling in the stock market with your money. Depending on the mutual fund provider, initial fees range from 0% to 8.5%. In order to recover from an 8.5% fee, your money must earn 9.3% just to break even. These commissions are hidden from the investor in various ways. Some funds are back loaded, that is you pay the commission when you cash out your money. Others prorate the sales charge over a number of years.

Mutual funds also charge ongoing administrative fees for running the fund, management fees for managing the funds assets, and transaction fees for buying and sell stocks on your behalf. These fees which are charged on an annual basis range from 0.05% for an index fund that requires no active management to as much as 2% of your entire investment! 2%! Every Year! These fees will have a very significant impact on the long term value of your holdings.

Like the sports book the mutual fund does not supply the money or take any risks. Keep that in mind when you study mutual funds.

Another thing to keep in mind is the Las Vegas line. Beating the major averages such as the S&P 500 or the Wilshire 5000 over time is very difficult. Consider the mighty Magellan Fund, once managed by the genius, Peter Lynch. As the fund prospered it attracted more money. The more money it had to invest the harder it became for Lynch’s successors to find outstanding opportunities. Finally, the Las Vegas line caught up with the Magellan fund. Under Bob Stansky, it under performed the market. During this time the fund’s holdings so resembled the S&P 500 Stansky described himself as a “closet indexer.”

When a salesman says his fund’s management is worth that extra large sales commission, be very suspicious. Morningstar rates mutual funds on the basis of their performance from a high of 5 stars to a low of 0 stars. Studies have shown that over time the high rated funds tend to drop and the low rated funds tend to get better. John Bogle, the founder of the Vanguard family of funds, has demonstrated that the impact of fund costs and the difficulty of beating the Wilshire 5000 over long time spans prove such claims to be false.

Of course betting on the outcome of a game played with a prolate spheroid by giant men on a pretty green field is not the same thing as investing in companies that produce real products. However, it is wise to consider some of the similarities especially when investing in financial products that contain fees and sales commissions.

Now, let’s be careful out there.

For those who wish to further explore the relationship between skill and luck across many kinds of human activities from chess (pure skill) to buying lottery tickets (pure luck), I would recommend an excellent white paper entitled Untangling Skill and Luck by Michael Mauboussin.

Untangling Skill and Luck

Wednesday, December 5, 2012

Thomas Jefferson: A Dozen Cannons of Conduct in Life

This was shared by a Facebook friend. I believe that this is only the second time I have offered a post without my comments.

Thomas Jefferson sent this list of A Dozen Cannons of Conduct in Life to a young granddaughter, Cornelia Jefferson Randolph.

1. Never put off to tomorrow what you can do to-day.

2. Never trouble another with what you can do yourself.

3. Never spend your money before you have it.

4. Never buy a thing you do not want, because it is cheap, it will be dear to you.

5. Take care of your cents: Dollars will take care of themselves.

6. Pride costs us more than hunger, thirst and cold.

7. We never repent of having eat too little.

8. Nothing is troublesome that one does willingly.

9. How much pain have cost us the evils which have never happened.

10. Take things always by their smooth handle.

11. Think as you please, and so let others, and you will have no disputes.

12. When angry, count 10. before you speak; if very angry, 100.

Saturday, November 24, 2012

Tzadikim Nistarim

Living the life you love or living a life that makes sense is one of the big debates across the personal finance/motivation community. On one extreme are teachers who counsel their students to do what they love, assuring them that if they do what they love the money will follow. On the other extreme there are writers who point to studies correlating college majors to careers at Starbucks as a barista.

The classic joke:

What is the question most frequently asked by someone with a liberal arts degree?
Answer: Would you like fries with that?

In between are authors who suggest that their readers make realistic compromises with life; first counting the cost of the lifestyle they desire; then selecting the most attractive career path with a reasonable probability of delivering that kind of income.

Let’s consider a different way to look at this problem, from God’s perspective. Many years ago I ran into Jewish folk stories of the Tzadikim Nistarim, the 36 hidden righteous ones. These are the people who are so righteous their prayers postpone God’s judgment. If even one of them went missing, the world would be destroyed.

In these stories the Tzadikim live humble holy lives, their great mystical powers hidden from the eyes of ordinary men. In some versions, the Tzadikim don’t even know their exulted place in God’s economy. Perhaps a great man who leads his nation through a dark time, then dies or disappears was a Tzadikim in his generation; perhaps the old man pushing a broom down the halls of your local school house is a prince in the Kingdom of our Lord.

I am privileged to have met a small handful of men and women whom I consider hidden treasures of our God. They live quiet lives of service and prayer, doing good, giving of themselves and their substance, extending mercy to those who do not deserve it, offering the world loving kindness and compassion wherever they find the need. I can imagine that perhaps one of them might be a Tzadikim Nistarim.

If the Tzadikim are the kind of people who impress God; just living a humble life of prayer and service to others, maybe I should try to live that kind of life, forgetting about my own self fulfillment and the implications that the latest headlines might have for my life.

There is a basis for this idea in scripture. When Abraham negotiated with God to spare the cities of Sodom and Gomorrah, God clearly stated that if only ten righteous ones could be found in those wicked cities, he would spare everyone from the destruction they so richly deserved.

Genesis Chapter 18:

20 Then the LORD said, “The outcry against Sodom and Gomorrah is so great and their sin so grievous
21 that I will go down and see if what they have done is as bad as the outcry that has reached me. If not, I will know.”
22 The men turned away and went toward Sodom, but Abraham remained standing before the LORD.
23 Then Abraham approached him and said: “Will you sweep away the righteous with the wicked?
24 What if there are fifty righteous people in the city? Will you really sweep it away and not spare the place for the sake of the fifty righteous people in it?
25 Far be it from you to do such a thing—to kill the righteous with the wicked, treating the righteous and the wicked alike. Far be it from you! Will not the Judge of all the earth do right?”
26 The LORD said, “If I find fifty righteous people in the city of Sodom, I will spare the whole place for their sake.” .
32 Then he said, “May the Lord not be angry, but let me speak just once more. What if only ten can be found there?” He answered, “For the sake of ten, I will not destroy it.”

Thursday, November 22, 2012

Richard C. Young The Ten Commandments of Investing

Sometimes I come across something that is so good I can’t stand not to share it. This post is taken from “10 Commandments of Investing” by Richard C. Young. For the record the author is also the editor of a newsletter, Richard C. Young’s Intelligence Report. Most of the time I subscribe to this service; sometimes I drop my subscription because the editor includes too many political rants in his publication. I am not paying him to tell me what is wrong with the world. I am paying him to tell me how to invest in the world as it exists. Sometimes I let my subscription lapse because I know if I wait a month or two I will be able to renew at less than ½ price. Richard C. Young is an old school value investor, just like I want to be when I grow up. He is pretty good. He does make some horrendous mistakes, but if you follow his advice on diversification you will not be hurt too bad by an occasional disaster.

1: Capital Preservation

The first rule of making money is, “Don’t lose what you already have.” Keep most of your money in a wide variety of relatively safe stable investments. Don’t put too much at risk at one time. This is particularly true after retirement. When you are no longer a part of the workforce, it becomes very difficult to recover from financial disasters. When you are young you can take more risks, but only after you pay off those credit cards and build up an emergency fund. Investment grade bonds, Treasury Bills, Government National Mortgage Association (Ginnie Mae) funds, cash (insured money market funds and the like), and stocks with a low beta are all good bets for capital preservation. Beta is a measure of volatility that can be found on quote pages on sites like Google Finance. A beta of 1.00 means a stock is as volatile as the market. Less than 1.00 means it is more likely to be safe and boring. Greater than 1.00 means the stock moves faster than the market.

2: Dividends

I would changes this one to Income, but this list belongs to Richard Young not to me. Income includes dividends from stocks (almost all of my individual holdings pay a dividend) and interest from bonds, certificates of deposit, and the like. Income is the second concern of the retired investor. In a perfect world my lost income would be completely replaced by interest and dividends from my investments. Unfortunately, I don’t live in a perfect world. Even if you are young, consider something like half of all your gains are going to be generated by the reinvestment of your dividends over time. Stock price is not real until you sell your shares for a loss or a gain. Dividends are real. They are money you can hold in your hand.

3: Compound Interest

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”
Albert Einstein

Compound interest is the miracle that allows you to pay $500,000 (over a 30 year time span) for a $100,000 house. It also allows you the opportunity to turn that daily cup of Starbucks coffee into a $500,000 retirement account. Right now savings are being punished by the Federal Reserve Bank. You can’t help that, so don’t be ashamed to pick up pennies. I do that every time I see one lying on the road. Remember that most brokers offer a free Dividend Reinvestment Program (DRIP) for American stocks. This allows you to use your dividends to buy more shares giving you the power of compound interest combined with the opportunity for capital gains.

4: Core Equity Holdings

These are the stocks you can ALMOST buy and forget. Sometimes they are called widow and orphan stocks. These are often low beta, dividend stocks. Dividend aristocrats are good candidates for your core equity holdings. A dividend aristocrat has increased its dividend every year for at least 25 years! Unbelievable! Unfortunately nothing is perfect. GE was a dividend aristocrat until it wasn’t. I took a beat down on that one. Various advisors would also include regulated utilities, consumer staples, and “wide moat” companies as possible candidates for your core equity holdings. A wide moat is an economic advantage that is very difficult to overcome. Imagine building a new railroad to compete with the Union Pacific Railroad out in California. That is a wide moat.

5: Buy Dividend-Paying Stocks During Bad Times

This can work really well. If you are lucky enough to buy an undervalued stock paying, let’s say a 3% dividend, and it doubles in price; you are effectively receiving a 6% dividend. The first quarter of 2009 was a perfect opportunity for this kind of bargain hunting. However, bottom fishing is not without its risks. Sometimes that stock is undervalued for good reasons and that juicy dividend is not sustainable. Watch the cash flow. Dividends should not be consuming too much of a company’s profit.

6: Automatic Withdrawal Programs

This is referring to the author’s variation on the 4% rule. Young suggests that retirees never withdraw more than 1% of their net portfolio value on a quarterly basis. Nice idea, but sometimes reality gets in the way. After I retire I will probably need to withdraw that much of my stash to prepare my house for the retail market. However, this is a good conservative rule of thumb. I would also flip the idea for folks still in the workforce. Save for retirement, your kids’ education, your next car, and similar long range goals using some kind of automatic investment program. Dave Ramsey recommends placing 15% of your total pretax income into tax sheltered investment vehicles as the long term basis for a good retirement program. The less you have to remember the better you are likely to do on this kind of savings program.

7: Avoid Investment Predictions

Much as I wish my combination of research and intuition could predict the future, no one knows what tomorrow will bring. Markets are extremely complex systems that are driven as much by human greed and fear as they are logical decisions based on knowledge and judicious analysis. Your investments will not go up forever. Some will make money. Some will lose money. Some will go up and down over time.

Make a plan and track the results. Jim Cramer recommends spending one hour per month studying each of your positions. That would include news articles, research reports, and technical analysis. I think that is probably a bit ambitious for most of us, but I would suggest that you check your balances at least once a month. If anything odd has happened dig into it. If you have built a portfolio with a foundation of bonds and low beta dividend aristocrats, chances are it won’t need a lot of daily attention.

If you picked a loser, take your tax loss; then go on and reinvest your money in something new. If a holding has grown over time until it is too large for a single position (say somewhere around 3%-5% for a single stock), don’t be afraid to sell a little. Rebalancing your portfolio from time to time is as natural and healthy as trimming the bushes in front of your house. As you put aside additional funds, invest them to maintain a balance that is appropriate for your age and your tolerance for risk.

I think this is a good place to mention high risk gambles. One of the weaknesses of my investment style is a complete inability to place a bet on a long shot every now and then. It is OK to invest a wee little bit of money every once and a while on something like a wild story about a micro-cap biotech firm with the next Viagra that is almost ready for human trials or the random fluctuations of a sick puppy like the Bank of America. Always remember if you can double your money overnight, there is a pretty good chance you could lose half of your money overnight.

8: Full Faith and Credit Investing

This goes back to rule number one, capital preservation. Treasury notes, insured bank accounts, U.S. Government bond funds, and Ginnie Maes are all backed by the full faith and credit of the United States of America. The only risk here is inflation. You will get your dollars, but what will they be worth when you need them?

I am beginning to change my mind on this one. I have owned foreign stocks for years, but never foreign bonds. To me full faith and credit has always meant a U.S. Government guarantee. Almost two years ago, I took my first baby step into foreign currency. I bought a little bit of a fund that buys short term notes denominated in Swedish Krona. Since then I have managed to loose about 2% of the money I invested in this new sector. The United States no longer has a AAA credit rating; might Swiss bonds be a safe place for a little of my money? Although I am afraid of the Euro, Europe is so impressed with German Federal bonds that the two year note carries a negative interest rate. That’s right. The rest of Europe thinks so highly of their German cousins, they are willing to lose a little in order to have the full faith and credit of The Deutsche Bundesbank standing behind their savings.

9: Avoid In-and-Out Trading

John Bogle, founder of the Vanguard family of funds, as well as numerous heavy hitters have demonstrated that it is almost impossible to beat the major averages over the long run. This means that the best plan for most of us is to invest our money in broad index funds and leave them there. Not only is it unlikely you can beat the computers that have replaced the day traders of yore, you will have all those additional brokerage fees eating into your profits. If you follow the mutual fund road, be sure to know all the sales charges and fees you are paying your fund manager and her salesmen. If you are totaling more than 0.5% a year you should probably walk away. Six and seven percent sales commissions as well as 12B-1 fees are a non-starter. If you see them run away. Vanguard is the world champion when it comes to low cost index funds, but there are others worth your consideration.

I believe I can buy shares in individual companies. I have done so and I have made money. I also have holdings in mutual funds and their more modern cousins, exchange traded funds. As my holdings have become more diversified, it has become harder for me to pick out individual companies from a class of stocks. Buying Chevron and Coca Cola were pretty easy decisions, but which Brazilian tree farm offers the best investment opportunity?

Again, technical analysis really works. Extremely disciplined traders using techniques based on sophisticated statistical methods can produce excellent results. This is just not my cup of tea. It would never be recommended by Richard Young. For those of you who want to learn more about this art, I recommend Technical Analysis for Dummies by Barbara Rockefeller. It is a good introductory text with an excellent bibliography.

10: Have a Plan and Patience

Young and a number of other authors suggest that you develop a written plan, a contract with yourself, before you start investing. This overarching plan will help guide your decision making process before you make individual decisions out of fear or greed. I would add, make this a joint contract signed by both husband and wife, as with the monthly budget.

There is more than one path to financial security. However, all of them require a systematic, disciplined approach over the course of an extended time frame. Don’t be tempted to alter your plan as the market rises and falls. Consider even minor changes to your contract with yourself an issue that will require serious study, thought, and discussion. This does not mean you will not sell a holding when it is overvalued or when it loses a predetermined amount of its value and triggers your automatic stop loss instruction. It doesn’t mean you won’t change your stock/bond/cash balance as you age. That sort of thing should be written into your contract. It is a strategic guide, an approach to solving problems over good times and bad.

In order to better understand the differences between strategy and tactics consider the American Civil War. At the war’s beginning General Winfield Scott proposed a plan to crush the Confederacy. First, use the Union’s superior Navy to enforce a blockade, depriving the Confederacy of access to foreign industrial products. Then seize control of the Mississippi, cutting the Confederacy in half. Finally, drive from the Mississippi to the Atlantic through the heartland of the South, while simultaneously driving South through Virginia. Although generals and tactics changed constantly and radically over the course of that long and bloody struggle, the basic Union strategy remained pretty much a constant.

One of the new things I have learned while writing this blog is the importance of time, not just the power of compound interest over time. I already knew that. What I have learned is your time frame is going to be a significant factor in the financial outcome of your life.

“The very poor think day to day.”

“Poor people think week to week.”

“The middle class thinks month to month.”

“The rich think year to year.”

“The very rich think decade to decade.”

Thanks to Marc Bastow of InvestorPlace for digging this jewel of a list out of the electronic storage bin.

Tuesday, November 20, 2012

Punctuated Equilibrium

“In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.”

This theory is often presented in books encouraging individual investors to stick with low cost index funds rather than attempting to invest in individual stocks, since there is plenty of information demonstrating that even the best investors seldom beat the averages over a long period of time.

“A random walk is a mathematical formalization of a path that consists of a succession of random steps. For example, the path traced by a molecule as it travels in a liquid or a gas, the search path of a foraging animal, the price of a fluctuating stock and the financial status of a gambler can all be modeled as random walks, although they may not be truly random in reality.”

This is another variation on the notion of an EMH. In this theory a given market or individual stock has a “true” value. However, the instantaneous value of such an investment will fluctuate in a random walk about this “true” value.

I have always had my doubts about efficient market pricing. Insider information can lead to large discrepancies between the perceived value of a stock and its actual value. More recently, scholarly studies have attacked this notion on psychological grounds. Bubbles are not rational. In hindsight it was pretty obvious that the real estate bubble could not continue forever. Could a condo in Florida that sold for $50,000 in 2000 really be worth $600,000 in 2006? Could this rising price trajectory continue into the future? The answer to both questions was, NO! Today that condo might sell at somewhere between $50,000 and $100,000 if a buyer can be located who wants to risk living in a mostly deserted building.

In the Intelligent Investor, Benjamin Graham, the father of value investing differentiates between two functions of the market. He observes that, “In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine.” Traders buy and sell on short term action, the random walk and short term trends. Investors buy what they believe to be value for the long run, ignoring daily fluctuations in pricing. It can be statistically demonstrated that long term thinking tends to reduce risk, but both methods work. The value investor believes that through research an investor can locate bargains that due to the instantaneous psychological balance between fear and greed represent a sound basis for a long term investment.

I would like to propose a new term to describe market behavior, punctuated equilibrium. This term is actually cribbed from evolutionary biology.

“Punctuated equilibrium (also called punctuated equilibria) is a theory in evolutionary biology which proposes that most species will exhibit little net evolutionary change for most of their geological history, remaining in an extended state called stasis. When significant evolutionary change occurs, the theory proposes that it is generally restricted to rare and geologically rapid events of branching speciation called cladogenesis. Cladogenesis is the process by which a species splits into two distinct species, rather than one species gradually transforming into another.”

More recent studies supporting punctuated equilibrium attack Darwin’s original theory of “gradualism,” the notion that evolutionary change occurs gradually over geologic time. The opponents of Darwin point out there is simply not enough evidence in the fossil record to support gradualism. That is, there are no intermediate species.

The instantaneous price of a share of stock represents its true market value at a moment in time, nothing more. The combined wisdom of millions of investors around the world has agreed on that price. However, that price will fluctuate over time both in short term “random walks” and in longer term trends. It has been demonstrated that most price movements in the stock market happen over relatively short time periods, in some cases in a single day or even a matter of hours. Psychological stresses build up in the investment community over time leading to discrepancies between the perceived and “real” value of a security. Then something happens that leads to a rapid correction up or down to a new equilibrium price.

So what are the takeaways? I have concluded that I can’t predict the future. I don’t even expect that I am smart enough to beat the S&P 500 or any of the major index averages on a regular basis. Since I don’t know on what days the market will jump 200 points or even 500 points, I will be in the market at all times. I believe that for someone of my age (61), I should have somewhere between 40% and 55% of my net worth excluding real estate in a widely diversified portfolio of stocks and the rest in bond funds and cash. When I believe the market is overvalued I will tend towards the lower end of that range and when the market has tanked I will move towards the higher end of that range, but I will maintain this discipline, frequently reminding myself I can not predict the future.

It is my desire to be satisfied so long as my net worth continues to outpace inflation and taxes while I am still working and doesn’t decline so fast after I retire that I will face poverty before I die.

Proverbs 30:

8) Remove falsehood and lies far from me;
Give me neither poverty nor riches—
Feed me with the food allotted to me;
9)Lest I be full and deny You,
And say, “Who is the LORD?”
Or lest I be poor and steal,
And profane the name of my God.

Monday, November 19, 2012

Bad Debt

Psalm 37:21
The wicked borrows and does not pay back, but the righteous is gracious and gives.

Proverbs 22:7
The rich rules over the poor, and the borrower becomes the lender’s slave.

Proverbs 22:26-27
Do not be a man who strikes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from under you.

Ecclesiastes 5:5
It is better that you should not vow than that you should vow and not pay.

Romans 13:8
Owe nothing to anyone except to love one another; for he who loves his neighbor has fulfilled the law.

Folks, sometimes I get tired of writing this stuff, but I will try again. Debt is not a blessing. In fact, in Deuteronomy God makes debt a part of the curse that befalls wicked nations. So here we go again.

European Union talks over the future of that monetary block just broke down. Their biggest problem? Too much bad debt. Greek bondholders have already lost 75% of the value of their holdings. Given that the Greek situation is not improving, a total default is possible. As the suffering of the average Greek increases, the Golden Dawn, a native fascist party is offering solutions that include clubs and steel toed boots. The Greek unemployment rate passed 25% in July. I couldn’t find any more recent data. In Spain the banks are collapsing as the result of a property bubble (more bad debt). Spain is on the verge of defaulting on their bonds. The only thing keeping them afloat are loans from the EU that pay the interest on their debt (more bad debt on top of bad debt!). The Spainish unemployment rate has also passed 25%.

Our country has passed the historically dangerous debt to GDP ratio of 100%. Individually, Americans are just about in the same bad shape as our Government. Collectively we owe something like $13 Trillion. U-6, the most accurate measure of U.S. unemployment has dropped below 15%. Let’s not get too happy about that number. It is five times higher than what was once considered theoretical full employment. One in five American homes is underwater. It is difficult to find a reliable number for mortgages in default, but the consensus seems to run about 10% or a bit more. Too much bad debt.

As their population ages, even the legendary productivity of Japanese industry is slowly being choked to death by too much bad debt. The Japanese bubble economy of 1986 to 1991 resulted in a deflationary spiral. The government poured billions into “zombie businesses” and make work projects in order to keep their economy from collapse. Although this resulted in what the Japanese term, “the lost decade,” their economy did avoid the complete destruction of a major depression. Now there is a price to pay. The Japanese economy has been described as a bug looking for a windshield.

I have written an entire blog entry on the effect that student debt is having on a generation of young Americans who find themselves unemployed or underemployed.

The Student Debt Diaster
Ultimately debt that can not be repaid will not be repaid. For the individual that means default, bankruptcy, and foreclosure. A nation with its own currency has a choice, default or the nation can just inflate the debt out of existence with a printing press. In my Franklin Planner I keep a $100 Trillion note from Zimbabwe. It is kind of pretty, but completely worthless.

The amount of debt you carry is not a status symbol. Please believe me. It is part of the curse.

Deuteronomy 28

[1] And it shall come to pass, if thou shalt hearken diligently unto the voice of the LORD thy God, to observe and to do all his commandments which I command thee this day, that the LORD thy God will set thee on high above all nations of the earth:
[2] And all these blessings shall come on thee, and overtake thee, if thou shalt hearken unto the voice of the LORD thy God.

[11] And the LORD shall make thee plenteous in goods, in the fruit of thy body, and in the fruit of thy cattle, and in the fruit of thy ground, in the land which the LORD sware unto thy fathers to give thee.
[12] The LORD shall open unto thee his good treasure, the heaven to give the rain unto thy land in his season, and to bless all the work of thine hand: and thou shalt lend unto many nations, and thou shalt not borrow.

[15] But it shall come to pass, if thou wilt not hearken unto the voice of the LORD thy God, to observe to do all his commandments and his statutes which I command thee this day; that all these curses shall come upon thee, and overtake thee:

[43] The stranger that is within thee shall get up above thee very high; and thou shalt come down very low.
[44] He shall lend to thee, and thou shalt not lend to him: he shall be the head, and thou shalt be the tail.

Friday, November 16, 2012

The Case for Couponing

Maybe an old dog can learn new tricks. I have never been a big fan of grocery store coupons. The ones that generally come my way are trifling discounts for overpriced products no prudent shopper would touch with a ten foot pole. My basic grocery store strategy is to create a list, usually a mental list, but a written list would be even better. Almost everything I have read on the subject recommends planning a menu, then generating a grocery list based on your plans. Impulse buying is always bad for a budget. Usually I buy generics or house brands if the quality is acceptable. If no acceptable quality generic is available I usually buy the brand name item that is on sale. If I have to pay full price for something I want, oh well. An example would be the Dole 100% Juice line of drinks. In my humble opinion they have no equal. They are well worth the price even when not on sale. I also play a game as I do my shopping. I run the totals in my mind while trying to memorize the sale prices. When I watch the clerk run the register it pleases me if my totals and memories are reasonably accurate.

I know a young lady who has developed couponing into a science. She has a large three ring binder filled with plastic holders made for baseball cards. She has an organized system for sorting coupons by store or product. She has a network of like minded women who trade coupons with one another. She scours the Internet for coupons for the products she wants to buy. She knows when sales and offers begin and end at different grocery store chains. Her grocery store experience has more in common with a planned military assault than what we laymen would call shopping. The results of her efforts are significant. With a full time job and all the other stuff on my plate it doesn’t seem like a new trick I want to learn….but maybe?

Yesterday, I made a trip to the grocery store. Amongst other items, I wanted to buy some Italian sausage to go with a pot of French Onion Soup I cooked earlier in the week. True to form, I scanned the appropriate freezer looking for sale items. I didn’t find any Italian sausage on sale but I did find Boar’s Head brand Knockwurst on sale, close enough. Here is how it worked out.

2 pounds of Knockwurst at $6.49 a pound = $12.98
Less $1.50 per pound sale price= $9.98

Here is the kicker. Each of the two remaining packages of this product came with a $4.00 instant coupon.

This lowered the price of 2 pounds of premium Knockwurst to $1.98! It was so unbelievable I asked a store employee if what I was seeing was for real. He assured me that would be the price at the register. He then asked me if there were any left at that price. When I told him I had the last two packages he was thoroughly bummed out.

One more discount; since I am over 60 I get a 5% geezer discount if I do my shopping on Thursday. I wonder why so many elderly customers show up on Thursday? So knock another 10 cents off the price.

2 pounds of Knockwurst at $6.49 a pound = $1.88! Woo! Hoo!

Maybe there is something to this couponing business. I think I will explore this more once I retire.

Thursday, November 15, 2012

You Must Choose, Brother, You Must Choose

Brothers and sisters, the time has come
For each and every one of you to decide
Whether you are gonna be the problem,
Or whether you are gonna be the solution.
You must choose, brothers, you must choose.

The MC-5 was a Detroit garage band that burst on the national stage with their one successful album. A few years later they were gone. They have been accused of being THE forerunner of punk rock and heavy metal. Whatever their place in music history they were really loud, their stage presence was fueled with way too much testosterone as well as lack of musical talent. My mother wouldn’t let me play that album when she was in the house. When I was a teenager, I really liked that band.

This morning I read two takes on the recent hurricane (Sandy) that hit New York and the Northeast coastline of the United States. One focused on the breakdown of the infrastructure of a great city and the breakdown in civil order that followed. Yes, the power system failed. In a high rise building, no power means no water. No water means no toilets. There were instances of looting, fights over food and gasoline, price gouging and a lot of bad behavior. By all reports this is still going on. The author recommends the Road Warrior solution; stock up on shotgun shells and gasoline. He also has his own natural gas generator and emergency food supply (probably a good idea); satellite phone and night vision goggles (why?). By the way, kudos to a friend of this blog who suggested that keeping a reasonable supply of cash in the house should be a part of our standard operating procedure. No power means no ATM.

The second article focused on what went right in the face of disaster. Restaurant owners giving away free food to those without a stock of Chef Boyardee in the pantry; groups of friends and neighbors spontaneously organizing teams to begin the clean up and rebuilding process. A bar owner managed to round up enough customers to load up 4 school busses, six cars, and two off duty policemen to run a convoy supply system to one of the hard hit areas. The article observed, “No receipts, no tax deductions, no cameras, no politicians, no news.”

The author of the second article noted the importance of churches and synagogues. He also observed areas that lacked such institutions did not fare as well as those with religious communities. It seems that when the chips are down religious organizations come through, doing what they should be doing all of the time, being salt and light in a dark and tasteless world.

So that brings us back around to the MC-5. You must choose, brother, you must choose. Every day we have to answer the question, “Are you going to be the problem or are you going to be the solution?” We make choices. Do they make us a better person? Does our presence make the world a better place?

Did we just curse or even cause the darkness or did we light a candle to help our brother find his way?

Tuesday, November 13, 2012

Help, Thanks, Wow

One of my facebook friends put up a link to a charming little essay on saying grace before a meal, written by Anne Lamott. I really don’t know much about Anne Lamott except that she writes novels my wife enjoys. She has also just published a book on her faith entitled, “Help, Thanks, Wow: The Three Essential Prayers.”

Counting Our Blessings
I was really challenged by the title of that book. Prayer was the essential component of the initial Silver Eagle Experiment. Somehow, as I have dug into the nuts and bolts of financial literacy, retirement planning, and investment fundamentals, I seem to have forgotten prayer. Perhaps this is because at times I find prayer difficult.

I think I should start with thanks. Sometimes I find it hard to be thankful, as I tend to dwell on what is wrong with my life rather than on the very many real blessings I have received from our good God. Worse, I tend to think that I have done it myself. Not true! I have been blessed with a good mind, a good German Protestant upbringing, good health for a man of my years, a stable 38 year marriage, a secure job with benefits, and many other blessings.

I certainly pray, “Help!” whenever I feel I am in need. Who doesn’t? I think that is OK. When we cry help, we are affirming our faith in a good and loving Father who, out of his great love, will run to help his children when they cry out in fear or need.

Like thanks, “Wow!” is certainly a word I should speak more often to our amazing God. There was a time in my life when I had a better understanding of worship. I guess the excesses I experienced in a certain church a long time ago made me suspicious of emotional manipulation by leaders with ulterior motives.

In trying to get a handle on worship, I stepped back and reflected on the deep truths of our faith. I was reminded of the famous passage found in Luke 10:

[25] And, behold, a certain lawyer stood up, and tempted him, saying, Master, what shall I do to inherit eternal life? [26] He said unto him, What is written in the law? how readest thou?
[27] And he answering said, Thou shalt love the Lord thy God with all thy heart, and with all thy soul, and with all thy strength, and with all thy mind; and thy neighbour as thyself.
[28] And he said unto him, Thou hast answered right: this do, and thou shalt live.

OK, let’s start with loving the Lord our God with my own human heart. I have experienced that emotion with others and I remember that on numerous occasions I have extended it to our Lord.

I just wanted to remind myself and my readers that prayer is an essential component in wise financial planning and management.

Here are the instructions from the original Silver Eagle Experiment the Lord started in my heart over five years ago.

When you touch the coin, or just think about it, ask the God who owns the silver and gold under a 1,000 mountains for wisdom and understanding concerning the management of money and the creation of wealth. If you ask God for wisdom, he will give it to you. I will keep the other coin and use it as a reminder to pray for you and for your intentions.

I would ask you to go one step further. Every day write down something God has revealed to you about money in this little notebook. It needs to be only one short sentence but write something every day. If it is a new fact, put a star next to that line in the notebook. If you discover that something you thought was true is in fact false, draw a line through that entry. If you take action on one of the facts, put a checkmark next to that line.

Let us try to remember to pray for one another not just for financial wisdom, but for every blessing that comes from our God.

Monday, November 12, 2012

Important Dates

Warning! Laws concerning Social Security, retirement accounts, and income tax law are so convoluted and abstruse, I consult my CPA anytime I am in doubt as to the consequences of my actions. I strongly encourage you to do likewise. A second set of eyes on your plans is a good idea even if your name is Warren Buffet and believe me, mine isn’t.

55 Years Old: Earliest age at which there is the possibility of a penalty free withdraw from a 401K

Your tax deferred retirement account is your last line of defense. Tapping it early is almost always a bad idea. However, if you leave your job or loose your job after the age of 55, you can withdraw funds without penalty under certain circumstances. The big catch here is you must continue taking these payments for five years or until you are 59 ½ whichever comes later. You will, of course, be required to pay income taxes on these funds, but you will not be hit with the dreaded 10% penalty. An example of how to use this exemption is described in an article found in Forbes. A very rich man who has many assets, chooses to make withdrawals from a 401K to buy a vacation cottage at the beach for his family. Given current low real estate prices and low mortgage interest rates, withdrawals that match his mortgage payments make sense given his entire financial situation. Beware! Even allowed exemptions can contain traps. An example given in another article found in Forbes notes, while there is a penalty free exception for higher-education expenses paid for from an IRA, this does not work for a 401K unless you roll the money from a 401K into an IRA before using the funds. I can’t over emphasize this enough! Please, check out any such move with an accountant before doing anything that might be irrevocable.

59 ½ Years Old: Penalty free withdrawals can be made from any retirement account

This is true of convention IRAs, 401K accounts, 403B accounts, SEP (Simplified Employee Pension Individual Retirement Arrangement) or SIMPLE (Savings Incentive Match PLan for Employees). Note: earnings from Roth IRAs are tax free and penalty free if you have held it for five years. I got to take a tax deduction on a loss suffered with a Roth IRA (lucky me) after I turned 59 ½ and after holding it for five years. Lesson learned, anyone who sells you a financial product containing a 12-B-1 fee is not your friend.

62 Years Old: Early Social Security

This is the earliest age at which you can collect Social Security benefits unless you are disabled. If you elect this option your benefits will be permanently reduced by approximately 25%. There are three reasons I can think of to take early Social Security.

1) Making the numbers work for freedom. If you are really close to early retirement and you really want your freedom, the reduced benefit might be just enough to kick you over the fence when added to your pension, 401K, and savings.
2) You lost your job and you can’t find another. More and more older Americans are being forced into early Social Security by economic circumstance. They want to work, but they can’t find a job. Early Social Security is their life line.
3) You think you are going to die sooner rather than later. This is a simple actuarial calculation. If you think you are going to die before 78-79 years old you are better off taking Social Security at 62. If you think you are going to live longer than that, wait and take full Social Security at 66-67 (depending on your birth date).

In any event, taking early Social Security can come back to bite you. If you write the great American novel after 62 or find the job of your dreams, there will be a hit to your Social Security check by the tax man. From Taxes on Social Security Benefits by Dan Anspach, “The key thing to know is that up to 85% your Social Security benefits received can be taxed, but never 100%. Why is this so important? It means that after taxes, $1 of Social Security income is worth more than $1 of IRA withdrawals because 100% of the IRA withdrawal is likely subject to taxation, whereas at most only 85% of Social Security benefits received will be subject to taxation. It is also important to note that ROTH IRA withdrawals do not count in the formula referenced above, but municipal bond income does.”

65 Years Old: You are eligible for Medicare.

If you are already receiving Social Security benefits, enrollment in Medicare Part A and Part B is automatic. If not, you need to apply at with Social Security. If you choose to decline Part B, you may be penalized for late enrollment if you change your mind at some future date. For those of us fortunate enough to carry private health insurance into retirement, the addition of Medicare complicates the coverage and payment process, but as in the case of my mother-in-law, her dead husband’s insurance saved the family untold thousands in medical expenses.

66-67 Years Old: Social Security Full Retirement Benefits

Depending on your birth date you can begin to collect Social Security without any reduction to your benefits. At your Full Retirement Age (FRA) you can draw full benefits even if you continue to work. For each year you delay beyond your FRA, your benefit will continue to increase by 8% a year until you turn 70. Note: there are games you can play with Social Security to maximize your benefits. Right now, I expect that my wife will take Social Security at 62. I plan to wait until my FRA before tapping my Social Security account. At that time my wife will switch from taking her benefit to taking a larger spousal benefit off my Social Security. This will increase the total amount we can draw from Social Security. Talk to someone who knows about these things, explore the Social Security calculators found on the web, run “what if” calculations that examine all options (your broker has tools for this sort of thing); start with a visit to the Social Security Administration web site, but don’t end your research with what is found at any one source.

70 Years Old: Maximum Social Security Benefit

Once you turn 70 that is it. You can’t increase your Social Security Benefit, so you might as well take it, even if your name is Warren Buffet.

70 ½ Required Minimum Distribution (RMD)

At this age you are required to take money from any of your tax-advantaged retirement accounts except for a Roth IRA or your 401K if you are still working. How much is determined by a complex formula based on your life expectancy and the amount of money you hold in these accounts. This calculation should be made by your CPA. If you have lived this long, worked for so many years, and accumulated some wealth, this is one you don’t want to screw up. From Social Security, Medicare, and More: What Are the Dates to Remember? By Carrie Schwab Pomerantz, “IMPORTANT NOTE: You absolutely must take your first RMD by April 1st of the year after you turn 70½ or face a hefty 50% PENALTY! And if you wait until that date, you must take your second RMD by December 31st of that same year. You don't want to miss these deadlines.” EEK!

And Please, Let’s be extra careful out there today.

Friday, November 9, 2012

We Owe God a Death

I honestly thought this article would be a Part II. I then went looking for Part I. It was never written.

My own death is not a subject that I enjoy contemplating, but as it is written, “We owe God a death.” I am over 60 years old and I still do not have a will. Generally young couples get a will after the birth of the first child in order to establish custody in the event of their death. For example, if my parents died I would have been raised by my father’s older brother and his wife. If my aunt and uncle died, my parents would have raised their two daughters. Since we never had any children custody was not an issue. My wife and I hold everything in joint tenancy or are designated as sole beneficiary in financial instruments such as insurance policies or tax deferred retirement accounts (think 401K). If one of us dies everything goes on as before, at least from a financial/legal viewpoint. But what if we both die? I asked my accountant that question 25 years ago. I was informed the State of Maryland would give ½ of our assets to each of our parents after they took their cut. Since we had just purchased a house, our net worth was somewhere around zero, I did not view this as much as a problem.

Time keeps marching on. The situation has changed. If you do the things that are taught by the well known financial literacy teachers, or even pay attention to this humble blog, you will eventually accumulate enough capital to make your will a serious issue. About one year ago, a man from the Missionary Alliance regional office appeared at our church one Sunday. He is a retired bank president now working for the Alliance as an estate planner. At no cost, he will sit down with a couple in the church and walk them through the process of estate planning until the finished document is ready to go an attorney. Of course, he is hoping the Missionary Alliance will eventually benefit from his ministry.

We started meeting with this man whenever he happened to be in town. There is no way you can complete this process in a single sitting. Then, due to my mother-in-law’s death, activity was suspended for a few months. Well, we are back on track. The final documents were reviewed and approved by my CPA. Yesterday they were scheduled for review by a panel of experts that does such things for the Alliance. I expect our package is now on its way to the attorney.

I really needed this guy to kick start my efforts towards drafting a will. Even a simple will is complicated. The “what if,” scenarios are endless. What if this guy dies before that guy? Then what. What if that guy dies before you? Then what? Who gets Grandma’s silver? The list is endless. I really don’t think I could have done it without someone asking me the right questions. Normally, this is done by the attorney drafting the will who is charging his client by the billable hour. This man offers a great service to his church district. May he be blessed!

Then there are tax considerations.

Please pay attention to this paragraph if you have a 401-K, a 403-B or have a serious amount of money in conventional IRAs. The use of the Charitable Remainder Trust is not limited to evil rich people. I have TSP account, the Government equivalent of a 401-K. My wife rolled a 403-B she inherited from her father into a Beneficiary IRA. These are pretax dollars. When they exit these protected accounts, they are subject to taxation at regular income rates. If upon my death, the funds from my TSP are rolled into a Charitable Remainder Trust my wife will get a tax deduction since these funds are now the property of the Christian and Missionary Alliance Church. The church is obligated by the terms of the trust to pay my wife an annual income of at least 5% of the trust’s net assets for as long as she lives. Since upon my death payments from my pension drop significantly even though I will be paying a substantial monthly premium so that my wife will have a survivor’s benefit, I expect she will need this additional income. Upon my wife’s death this income stream will be diverted to our heirs and assignees for the next 20 years. At the end of this time, the church gets to keep the balance. If they do a good job managing our money this could be a significant sum.

This is my simple attempt to describe a complex legal vehicle. I would encourage you to consult a CPA and an attorney before making any irrevocable decisions.

Until we die our TSP account and Beneficiary IRA will constitute our last line of defense in retirement. These tax deferred instruments are marked, “In case of emergency, break glass.” If these accounts still exist after our death they will become a blessing to others and ultimately a gift to our Lord.

Dixi, custodiam. Psalm xxxix. (from the 1928 Book of Common Prayer)

LORD, let me know mine end, and the number of my days; * that I may be certified how long I have to live.
Behold, thou hast made my days as it were a span long, and mine age is even as nothing in respect of thee; * and verily every man living is altogether vanity.
For man walketh in a vain shadow, and disquieteth himself in vain; * he heapeth up riches, and cannot tell who shall gather them.
And now, Lord, what is my hope? * truly my hope is even in thee.
Deliver me from all mine offences; * and make me not a rebuke unto the foolish.
When thou with rebukes dost chasten man for sin, thou makest his beauty to consume away, like as it were a moth fretting a garment: * every man therefore is but vanity.
Hear my prayer, O LORD, and with thine ears consider my calling; * hold not thy peace at my tears;
For I am a stranger with thee, and a sojourner, * as all my fathers were.
O spare me a little, that I may recover my strength, * before I go hence, and be no more seen.

Wednesday, November 7, 2012

What Am I Going to Do Today?

The Legatum Institute of London is one of those think-tanks taken seriously by financial journalists. Every year they rank the countries of the world in a prosperity index based on 8 factors; Economy; Education; Entrepreneurship & Opportunity; Governance; Health; Personal Freedom; Safety & Security; and Social Capital. For the first time in history, the United States has dropped out of the top ten. Two reasons given are the U.S. fell eight places in the ‘Entrepreneurship & Opportunity’ sub-index and fewer US citizens agree that working hard results in success.

If you are interested here is the list.
1. Norway
2. Denmark
3. Sweden
4. Australia
5. New Zealand
6. Canada
7. Finland
8. Netherlands
9. Switzerland
10. Ireland
11. Luxembourg
12. United States

I don’t know much credence I would give this list until I better understood the definitions of their criteria, but I certainly do acknowledge things have been getting worse for over a decade. So what do we do now that the U.S. Dollar has lost its AAA rating and we have dropped out of the top ten prosperity list?

The same things we should have been doing yesterday.

* Stay out of debt, especially credit card debt.
* If you are in debt, pay it off as quickly as possible.
(Build an emergency fund. Start with $1,000. Six months take home pay is the long term goal.
* Take advantage of your employer’s 401K plan if you have one.
* Think long term. This starts with deferred gratification but it is more than that.
* Plan a monthly budget. Stick to it.
* If you are married, work as a team. No secrets.
* Systematically invest your money (even a little) in bonds, CDs, money market funds, real estate, gold, dividend stocks, growth stocks, and foreign stocks to name just a few categories. You don’t know what the future will hold.
* Give. It is good for your soul.

The dollar may go up. The dollar may go down. Our Treasury and the Federal Reserve Bank want the value of your money to drop, but Europe, Japan, and China all have the same plan. If the Euro gets shaky the Dollar may go up. Bond prices, interest rates, and monetary velocity are a few of many variables in this complex equation.

Gold may go up. Gold may go down. It has been demonstrated that fear rather than inflation drives the price of gold. When people are confident, even in times of inflation, like the 1990s, gold goes down in value. When people are afraid, as in the late seventies and the last few years it goes up.

Commodities may go up. Commodities may go down. Inflation and currency devaluation drives the price of commodities, such as gasoline, up over time. Drops in demand, like the recent decline in the Chinese construction industry, lower the price of commodities and their producers’ stock values.

Stocks may go up. Stocks may go down. Money has to go somewhere. If the value of a dollar is dropping, stocks that represent real value independent of currency fluctuations will soar. If we fall into another depression, the values of shares and the future profits they represent will plummet.

Stay awake. Stick to your plan. Constantly work to free yourself from negative emotions like fear, greed, envy, and pride.

And please! Let’s Be Careful Out There!