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!

Tuesday, November 6, 2012

Sit, Walk, Stand

Ephesians 2:
[5] Even when we were dead in sins, hath quickened us together with Christ, (by grace ye are saved;)
[6] And hath raised us up together, and made us sit together in heavenly places in Christ Jesus:
[7] That in the ages to come he might shew the exceeding riches of his grace in his kindness toward us through Christ Jesus.
[8] For by grace are ye saved through faith; and that not of yourselves: it is the gift of God:
[9] Not of works, lest any man should boast.
[10] For we are his workmanship, created in Christ Jesus unto good works, which God hath before ordained that we should walk in them.

Sit: If you are a Christian start with the idea it is going to be OK. Not because of what you have done but because of what has been done for you. I am not suggesting that the Lord is going to buy you a Mercedes Benz, but he has promised that he will provide for you. As a typical American male, I find this concept difficult to grasp. I want to do it myself. Nothing wrong with that, but it is not the right place to start. Instead start with trust in your Lord and Savior; that he can take care of your needs. He can guide you as you manage your finances. He has said, “If any of you lacks wisdom, he should ask God, who gives generously to all without finding fault, and it will be given to him.”

Ephesians 6:
[5] Servants, be obedient to them that are your masters according to the flesh, with fear and trembling, in singleness of your heart, as unto Christ;
[6] Not with eyeservice, as menpleasers; but as the servants of Christ, doing the will of God from the heart; [7] With good will doing service, as to the Lord, and not to men:
[8] Knowing that whatsoever good thing any man doeth, the same shall he receive of the Lord, whether he be bond or free.
[9] And, ye masters, do the same things unto them, forbearing threatening: knowing that your Master also is in heaven; neither is there respect of persons with him.

Walk: Once you have your priorities in good order, you will learn as you do what needs to be done. Start with the basics, don’t be a thief. If you are an employee do a good job for your employer. If you run your own business, give honest value to your customers. If you are the master of a great corporation, remember you have an obligation to care for your employees, your customers, and your shareholders. When you find pride, greed, sloth or envy in your heart, repent; none of us are perfect. We all wrestle with our own issues. Pray for guidance before you spend or invest money. He will answer your prayers. Read the Book of Proverbs. It is loaded with timeless financial advice. Learn to trust your conscience. If you are resting in Christ, it will provide a very good guide. If you are not resting in Christ, return to step one, get your heart right, then return to the marketplace.

Ephesians 6:
[10] Finally, my brethren, be strong in the Lord, and in the power of his might.
[11] Put on the whole armour of God, that ye may be able to stand against the wiles of the devil.
[12] For we wrestle not against flesh and blood, but against principalities, against powers, against the rulers of the darkness of this world, against spiritual wickedness in high places.
[13] Wherefore take unto you the whole armour of God, that ye may be able to withstand in the evil day, and having done all, to stand.

Stand: Folks, we are in a battle against wicked spirits in high places. If you don’t think the World’s financial system is influenced by the wicked one, you are kidding yourself. When you step out into the marketplace you are contesting with the enemy, but it is OK the Kingdom of God is within you. Wherever he directs you to make a stand is his territory. We have all the weapons and armor we need to be victorious. You are His servant and you are acting in His Name. We have already won the battle, if we stand. It won’t be easy but the promise is there.

Many consider the book of Ephesians the most purely spiritual of Paul’s epistles. On the surface it does not have a lot to do with finance or the management of money beyond a few simple instructions we have already learned. I would challenge you to change the way you think about money. Don’t compartmentalize it as something unspiritual, something dirty. Integrate your financial life into your spiritual life. In the end all we are and all we possess are His, even though I forget that fact on a daily basis.

May God have mercy on my soul.

Sit, Walk, Stand is a classic study of the Book of Ephesians by Watchman Nee.

Monday, November 5, 2012

Stress Control

This one is a little different, but I hope you find it of value. This information comes from an email newsletter written by Tom Hoobyar. The U.S. Navy SEALs are generally considered our best, most highly trained commando force. When planning a surgical strike, such as the assassination of Osama Bin Laden, our leaders use SEAL teams. Their training is intentionally designed to wash out all but the very best. A SEAL must be able to operate perfectly under conditions of unbelievable stress. Imagine, trying to do a job knowing that anything less than perfection will result in your death and the deaths of your friends. Now that is stress.

The Navy was losing about 75% of SEAL candidates in the first few weeks of training. These men were incredible athletes. They tested very high on intelligence tests. They had the background and skill set to be successful, but way too many were failing. Why? Navy psychologist who studied the problem discovered the key difference between success and failure was the ability to handle stress. The highly qualified candidates that failed didn’t have any shortage of abilities or talent. However, they lacked technologies or practices that would allow them to deal with extreme stress.

The SEAL Command Psychologist, Commander Eric Potterat revealed the four most important techniques that are now taught to SEAL candidates early in their training.

1)Goal Setting –This is not the kind of goals I write about in this blog or what is found in life purpose and motivational teaching. This is how to survive through the next 30 minutes of a live fire exercise. It is the same kind of narrow focus used by successful performers and athletes. Nothing exists to the Olympic sprinter but the next 10 seconds. If you are facing a very stressful situation at work or in your life, narrow your focus until nothing else exists but the immediate task.

2)Mental Rehearsal (Visualization) –Commando missions require perfect execution of complex actions performed by a team. In preparing for such a mission, soldiers go over what is expected from them over and over in their minds. Again, it is similar to techniques taught Olympic athletes. It has been demonstrated that systematically visualizing an activity such as basketball foul shots for a ½ an hour produces results that are almost as good as actually practicing foul shots for ½ hour. Combining physical and mental practice produces much better results than either method used without the other.

3)Words (Self Talk) –Actually this one surprised me a bit. The words that the SEAL trainees used when talking to themselves proved of enormous importance. Today they are taught to say, “Stop!” or “Cancel!” if they find themselves engaging in negative self-talk or thinking about failure. Then they are taught to say in their own words, “You can do this.” Or “This is easy.” Whatever works for that particular individual.

4)Arousal Control –This is a basic breathing exercise designed to lower your blood pressure and raise the oxygen level in your brain. First, inhale deeply as you count to six in your mind. Then hold your breath for a count of two. Then exhale for another count of six. Repeat three times.

Try these exercises the next time you find yourself overwhelmed by life or when you get that sick feeling in the pit of your stomach or that clammy feeling that comes on just before a panic attack. If it works when people are trying to kill you it will probably help with your problem.

Sunday, November 4, 2012

Why Invest?

Why invest? Because there will be a tomorrow. If not for you, then for someone you love.
How to invest? Start with what is in your hand.
When to invest? Now. Don’t wait for the perfect investment. Do something that makes sense today.

For the sake of this article, let’s divide all investments into two categories, cash and equities. Yes, I know this is overly simplistic, but I am trying to be overly simplistic.

Think of cash as something that keeps its value over time, a dollar buried in a mason jar is still a dollar, guaranteed. Basically there are two kinds of cash, short term cash and long term cash. Short term cash would include $20.00 bills, checking accounts, savings accounts, and money market funds, money you can put your hands on today without penalties. Long term cash would include investment grade bonds, government securities, and certificates of deposit. While a 2% bond will crash if interest rates jump to 10%, it will regain its value as it approaches maturity. When that bond reaches maturity, the holder will receive the cash value of the bond no matter what the interest rate.

Equities are the other kind of investment. These are basically ownership rights that never expire. A share of Exxon stock represents some miniscule bit of a great enterprise. You own it and if you are lucky it pays you a dividend, every quarter. You can own shares in individual companies or baskets of different companies called mutual funds, exchange traded funds, or closed end funds. You could also buy 10% of your buddy’s start up business or even own your own company. All of these investment vehicles I term equities.

Of course there are other things that are not really this or that, consider gold and preferred stock. I consider gold to be money. I know that it is just another commodity that rises and falls in value according to the law of supply and demand, but in my head gold is money. Preferred stock is neither a stock nor a bond. It has no ownership rights, generally it has no fixed value at a future date, generally preferred stock is not perpetual, but it does pay a dividend, usually a very good dividend. Just for grins let’s throw that one into the equities bin.

Real estate beyond your home, which is as much an expense as investment? Let’s consider investment properties whether owned individually or as shares in a Real Estate Investment Trust as equities.

You need all of the above to mitigate risk, individual risk and systemic risk. You can’t hold everything in cash because of the risk of inflation and taxes. You can’t hold everything in a single equity because of individual risk. British Petroleum was one of the best companies in the world. It was well managed and it paid a terrific dividend. BP was even the best play for investing in alternative energy technology. Then a black and oily swan flew over a deep water drilling platform in the Gulf of Mexico. BP lost ½ its value in a few weeks. Owning mutual funds protects you from individual risk, but not from systemic risk. If the stock market crashes, your funds will crash with the stock market. If that happens, you want cash, a lot of cash. Then you can snap up bargains when everyone else is panic stricken.

I can’t predict the future so I invest a little here and a little there. A little bit done on a frequent and recurring basis over an extended period of time works.

Don’t get too smart for your own good. If you can’t explain what you are doing to a junior high school student, you probably shouldn’t be doing it. If you don’t understand it, don’t buy it.

Don’t wait for the perfect time or the perfect investment. Do something today. If you are afraid the market is overpriced, put a little bit in a Government insured money market fund. If you are afraid of inflation or taxes buy a share in a stock or a sector fund your research tells you is undervalued. If you are afraid of inflation and the market, consider a hybrid fund that invests in both bonds and stocks.

Don’t be afraid to make mistakes, little mistakes. If a couple with a combined income of $60,000 a year carrying a typical mortgage payment and a car note with $15,000 in the bank, invested $1,000 in BP right before the oil platform fire. They lost $500, painful but not the end of the world. If they had invested their entire $15,000 that couple would be a world of hurt, probably for at least 2 years.

Above all, get out of debt. Let’s say you have a credit card balance that carries a 12% interest rate. Paying that card off is a guaranteed after tax rate of return of 12%. Where in the world can you get a better return on your money?

Now let’s be careful out there!

Saturday, November 3, 2012

Death in America (Part IV)

It has been four months since I wrote Death in America (Part III). It has been almost eight months since my mother in law died. Still the process rolls on. At the time of my mother in law’s death, our attorney assured me that managing my mother in laws affairs would be a part time job for the next six months. He wasn’t kidding.

The last time I talked our attorney, most of the heavy lifting was finished. He said, “Wait until the end of the year to execute the will in case anything else turns up.” The only loose ends that I can identify are one outstanding ambulance bill, actually the last ambulance bill and one small IRA. The insurance company isn’t certain that ambulance ride constitutes an emergency. Let’s see. An 86 year old woman is simultaneously suffering from heart failure, kidney failure, and pulmonary failure. Six days later she is dead. Not an emergency? The one little IRA was purchased years ago at the neighborhood bank. The bank was ultimately eaten up by one of the big four banks. The big four bank moved the IRA from the branch in Georgia to a central location in South Dakota. They are unsure of my wife’s status as beneficiary or executor. In their infinite wisdom they have decided my wife is not sole beneficiary but as sole surviving child she obtains sole beneficiary status, meaning the money is not part of the estate. My accountant’s reaction is, “Huh???” After filling out four separate forms, we still haven’t seen any money.

There is one more problem. This week my mother in law received a tax bill for money my wife inherited as sole beneficiary from a wretched annuity company that will remain nameless. After wrestling all those annuity issues to the ground, you don’t want to hear my opinion of annuities or the people who sell them. My mother in law’s accountant is somewhat surprised by this as he personally informed the IRS of my mother in law’s death and a tax ID has been issued for my mother in law’s estate. Now my accountant and my mother in law’s accountant need to sort out this mess.

In the middle of all this our attorney died. He was an elderly gentleman (and I do mean gentleman). He was a friend of the family, attended the same church as my wife’s family, and served as the family attorney for probably decades. He will be missed. We were informed of his passing by my mother in law’s accountant. Since he wasn’t part of a practice, I assume he was he was relieving the boredom of retirement by working part time as a favor to old friends. I called up the Probate Court in Georgia. They were aware of his death. They suggested that we go ahead and execute the instructions of the will. Once the terms of the will have been executed and the estate taxes paid, we can fill out the form that petitions the court to close down the estate. We were told that does not require an attorney.

Of course there is still a large storage unit in Atlanta filled with my mother in law’s possessions. I think I could empty out that unit in a week. Four piles of stuff; sell it; take it to our new home once we move; give it away; throw it away. I think with my wife’s help this will be at least a one month job. I don’t think I can stand more than a week at time. It isn’t important or urgent. My wife inherits all of my mother in law’s physical stuff. The storage unit rents for $188 a month. We can take our time with that problem.