Sunday, March 31, 2013

Smart People Shouldn't Do Dumb Things ... More Good Advice for Individual Investors

Lots of people do dumb things when it comes to individual savings and investments for the long run.

That's often because of a knowledge deficiency about the particular subject involved and not due to a lack of intelligence. In fact, we're all pretty much in the same general range when it comes to basic intelligence.

Thus, people with long term financial needs (that's all of us) don't begin with the requisite knowledge to always make good decisions for the benefit of themselves and their families. As a result, they are inclined to follow the "safe and lazy" route of avoiding investing in "risky" stocks. Either that or they mistakenly pay for and then blindly follow the frequently wrongheaded and generally shortsighted "advice" of so-called commission paid investment experts, or worse yet, follow the herd instincts of similarly situated unknowing individual investors.

Five Really Dumb Money Moves You've Got to Avoid has some solid advice for individuals:


"You know the smartest things to do with your money. But what are the worst moves? What should you avoid?

Weirdly enough, they are things that a surprising number of people are still doing—even though they probably know, in their heart of hearts, how foolish they really are.

Any list is going to be incomplete. But here are five to avoid.

1 Reaching for yield

What this country needs is a good 5% certificate of deposit. Instead the collapse in interest rates, and the Federal Reserve's policy of keeping them down for as long as possible, is driving people crazy—especially people who need to generate income from their investments.

In these circumstances, people start to do really foolish things in the desperate hunt for higher interest rates. That includes taking on crazy amounts of risk, or investing in complex products they don't understand, in the hope of higher yields. The Fed is producing a bull market in scams, Ponzi schemes and associated rackets. . . .


2 Going into the poor house to send Junior to a country-club college

Over the past 40 years, the cost of tuition and fees at a private university has tripled—after accounting for inflation. The cost of a public university has quadrupled.

The cost of getting a bachelor's degree has become a scandal in this country. Students spend $160,000 on a four-year degree and the results are too often questionable.

Financial planners strongly advise parents against plundering their own retirement savings, which they are likely to need, to pay for this.

Admittedly, a degree has become a protection racket—you can't get a job without one, but there are fewer jobs for those with them. But the smart move for the budget-constrained is to get a bachelor's degree at a public university. The tuition and fees average less than $9,000 a year instead of $30,000 at a private college.

3 Owning stock in your employer

This is one of the silliest and riskiest moves any investor can make. If the company hits trouble, you get whacked twice. You can lose your job and your savings—all in one fell swoop. Ask anyone who worked for Enron…or Lehman Brothers. . . .

At companies where the 401(k) plan offers the option, workers aged 40 or over typically hold about 20% of their entire 401(k) account in the company's stock, according to EBRI data. Crazy.

4 Taking Social Security too early

If you can afford to delay taking your Social Security retirement benefit, do.

Someone earning $50,000 a year who starts claiming Social Security as soon as he or she is able, age 62, will typically collect a monthly check of about $1,000, according to the Social Security Administration. If they wait until they are 70, that amount would double.

Taking Social Security too early, or without thinking through the consequences, is one of the biggest financial blunders people can make . . . . The lure of getting money early can blind people to the big cost down the road. . . .

In any case, it doesn't take more than just a few years before the total money accrued with the higher, later benefits surpasses the total earned starting at the earlier retirement age.

But that understates the bigger issue. Social Security is insurance. For many retirees, the big risk isn't that they will run out of money before they turn 70, but after 85. According to the Centers for Disease Control, more than half of women currently age 65 will live to 85 or longer, and three out of eight men.

David Blanchett, head of retirement research for financial research firm Morningstar, says it makes sense for women, married couples and those with good health to wait longer for a bigger paycheck.

5 Buying long-term bonds

A surprising number of people still subscribe to the flawed and circular argument that bonds, including long-term government bonds, are "safe." In reality, bonds—especially long-term government bonds—are the rare example of a bubble that has been explicitly declared.

The Fed is openly printing money and using it to buy up such bonds, driving up the price and driving down the interest rates, in order to help the economy. There is no dispute about this. It's public policy.

A 30-year Treasury bond currently sports an interest rate of just 3.1%. . . .

The only reason to buy such bonds in any quantity is to gamble on a 1930s-style depression and world-wide deflation. Such bonds are a gamble, not a safe haven."

Summing Up

The more we know about how things really work, the better off we are. So let's get knowledgeable about saving, borrowing and investing for the long run. And let's do it NOW.

Perfection is very much the process of subtraction and not addition. When two teams of players with generally equal skills and talent compete, the team that makes the fewest mistakes invariably wins.

And it's the same with life in general and individual investing in particular. If we don't make lots of mistakes along the way, we'll be better positioned to capitalize on the many opportunities in life.

Thus, not getting behind the 8-ball early in life is rule #1.

And not getting behind the 8-ball as we become older is rule #2.

In other words, let's try to not do dumb things that will need to be undone. But when we do them, let's stop this insanity asap and dig ourselves out of the 'mistake' hole as quickly as possible.

Here are three rules to play by in life or any other 'game:' (1) Don't get behind; (2) But if behind, catch up asap; and (3) If ahead, work hard to get further ahead.

And that 1-2-3 route to winning consistently and over time is all about not making mistakes and correcting them when we do make them.

To repeat, perfection is the process of subtraction.

So let's try hard to avoid getting into bad habits, but then commit to working hard to rid ourselves of those that we will certainly develop from time to time.

Knowledge is the key. Continuous learning is the process. The rule of 72 works.

That's my take.

Thanks. Bob.

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