Crisis: Real or Manufactured?
07/29/11 16:43 Filed in: Investing | Media Critque
Dear Bridget,
Is there anything we can/should do about the pending
debt-ceiling deadline? Should I be getting cash out of the
bank to pay for bills and groceries, for example? A recent
article I read makes me kind of anxious. It says that if the
politicians don't figure something out, banks will be SOL
leading to a massive cash-run on banks. What do you think?
Dumb questioner of the week
Dear DQOTW,
This isn't a dumb question!
With the pundits out there beating fear drums, it's difficult to ignore the drama playing out in Washington. Talking about a run on banks is a doomsday
prediction. The markets, banks etc., are not going to be
blindsided by this, so I think a doomsday scenario is
unlikely. Many people seem to assume that if the interest
isn't paid to bondholders, the bonds will immediately become
worthless. However, they won't be worthless. I think instead
of being worth 100, they will be worth something less, like
98.
Please allow me to digress with a recent personal experience.
Lately, I've been very stressed. My dear husband and I are
attempting to sell our house, buy another one, and move. Two
weeks ago I was at maximum anxiety. I couldn't stop
thinking--what if it doesn't go through on the day we planned?
I broke out and couldn't sleep. Then, the deal didn't go
through on the day we planned. We adjusted. Actually, it
meant that both us could attend my annual family campout,
which was fun. The deal getting delayed wasn't that big of a
deal. The experience made me realize three things:
1. Most of what we fear doesn't happen;
2. When what we fear does happen, we deal with it better than
we anticipated when we were stressing about it;
3. What derails us are the events that we don't
anticipate-when the earthquake and tsunami randomly strike.
Using the system that I work with (called functional asset
allocation), you invest your net worth mindful of protecting
yourself against different things that can go wrong. You also
protect against the "triple whammy" (when 3 things go wrong at
once.) I encourage clients to control the things they can
control (their savings, spending, and net worth allocation)
and let go of the things they can't control (interest rates,
market returns, and politicians.)
That being said, interest rates will probably go up. You
don't have to have a PhD in economics to realize that interest
rates are at historic lows; pretty much all they can do is go
up. So, for instance, if you're planning on buying a car on
credit, that might be one reason (and only one reason) to buy
it now rather than later. However, if you don't need a car,
or one of many other reasons not to act now applies to you,
don't do it.
When trying to sift and winnow through the financial punditry,
remember to follow the incentives. Politicians, writers, and
newscasters know that fear can motivate your reading and
viewing habits. Generating fear generates business. If
writers want to seem relevant, they have an incentive to
generate fear. The politicians and the pundits are benefiting
from this crisis right now. When the incentives change, the
crisis will be resolved.
Want to see a humorous take on this subject? Check out Ken
Robinson's "It Won't Go to Zero." While Ken wrote and
produced this rap about the stock market crash, IMHO, it
applies nicely to the current crisis as well.
0 Comments
Safe investing
08/04/10 13:01 Filed in: Investing
Dear Bridget,
In the 70s, when I was in high school, I shared a Pinto with
my sister. She bought the gas, I bought the oil. When the BP
crisis hit, inspired by the exhilaration of getting the Pinto
up to 60 mph with the windows open, I bought some shares. I
know it's a risky investment.
I'm wondering what I can buy on the conservative side to
balance my wild freewheeling. Maybe my angst is out of line,
but I would like to buy something that will most assuredly
maintain its value. I'm not impressed with the interest rates
offered by FDIC-insured cash accounts. I've heard some gold
talk, but it seems like a big step into the back-alleys of
commissions and swindlers.
I am a regular reader and follow your advice closely to
maintain some savings.
Pinto Inspired
Dear Inspired,
I love your reasoning for buying BP!
Pretty much all researchers, including Nobel-prize winners,
conclude that you can't "beat the market." In other words, no
one can reliably pick stocks that will make more money than the
market. Still, some people have an emotional desire to pick
stocks, and there's nothing wrong with that. Just be smart.
I suggest that you hold your stocks in a separate "fun money"
account. Don't let the account grow to over 10% of your total
portfolio. When the value of your "fun money" grows to over
10% of your total portfolio, transfer some to your other
accounts to bring it in line.
Never add money into your "fun money." If it runs out, then
you're stock picking days are over. You're done.
For the other 90% of your money, design a well-diversified,
tax-smart, low-cost portfolio.
Since you ask specifically about investments that are not
risky, I suggest US Treasuries known as "strips" as part of your portfolio.
You can buy these through your broker (like Schwab or Fidelity) or from US
Treasury Direct. Currently a buying a treasury strip that
matures in 2026 costs approximately $5,470 and will pay
$10,000 in 2026. That's a yield of around 4%.
Any financial professional who earns money based on
commissions will discourage you from this strategy. They
earn little if any commission on US Treasuries. "Oh, the
yields are so low," is what I've heard. In fact, treasuries
protect you against deflation, because even if prices on
everything start dropping, in 2026, you'll get your $10,000.
Plus, the yields on treasuries always seem low. You're buying
them because they're safe and earn more than a CD, not to try
to out-earn BP. The yield seemed low when I bought US
Treasury Strips in early 2008, but seemed brilliant a year
later.
In fact, for clients and for myself, I build what is known as
a treasury bond ladder for retirement. The ladder is designed
to have a set amount of treasuries maturing each year. This
creates what amounts to a guaranteed paycheck during
retirement.
You also ask about gold. You don't invest in gold; you
speculate on gold. Gold grows in value when someone else will
speculate more wildly than you did when you bought it. Some
people want gold in case all hell breaks loose. It makes them
feel safe. They like the option of being able to make a run
for it with their gold stash. I like feeling safe, too.
If you're in this camp, you could use 1-2% of your portfolio
"fun money" to buy some gold. Take physical custody of it;
put it in your safe at home. Buy enough to get you over the
border, and remember the practicalities you are trying to plan
for; small coins will probably work best. You don't want to
be stuck trying to get change for $1000 gold bars when the
banks have closed.
To take the next step down this road, add the following to
your safe: guns, ammo, water, and copy of your favorite Mad
Max movie. If you can't watch Mel Gibson anymore, I thought
The Book of Eli was okay and 2012 was even better. However,
none of these movies feature a post- apocalyptic gold
standard. According to them, if all hell breaks loose,
you'll want guns, ammo, and perhaps a jet.
Shopping Angst Revealed
06/18/10 21:05 Filed in: Shopping
Make shopping less stressful and lower the overall stress in your life! Read More...
Tips to avoid online advertising pressure
05/25/10 10:15 Filed in: Shopping
Nichole Rohr recently interviewed me about saving money and angst while shopping online. She put together a terrific article about it.
Check it out by clicking here
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Check it out by clicking here
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Don't Worry about Tax Hikes
02/25/10 14:27 Filed in: Media Critque
Don't believe the hype on tax hikes. And certainly don't
spend precious energy worrying about them.
A Kate and Joe were in yesterday. They are professionals
raising four kids, who, between the two of them, make around
$350,000 a year. They were bemoaning the fact that, according
to the media, their taxes are going to go up.
When we actually looked at their numbers, I had a different
prediction: their taxes won't go up. How could this be?
Please excuse me while I get a bit tax-geeky (and
simultaneously simplify the tax code and the political system
for explanatory purposes.)
$15,000 of the $120,000 Kate and Joe pay in federal taxes is
the dreaded "Alternative Minimum Tax" or AMT. While
Alternative Minimum Tax sounds appealing, it basically limits
the deductions of people who make between $200,000 and
$600,000 a year. It usually kicks in if you pay a lot in
property tax or state income tax and earn $200-600K. Most
people who are paying it don't know they're paying it and
don't care about the distinction between regular tax and AMT.
It's all the IRS to them.
However, if regular tax rates rise, before Kate and Joe would
actually have to pay more, their AMT would have to go down to
zero. For instance, if the top bracket goes from 35% to 39.6%
on people making over $250K, Kate and Joe's taxes would
theoretically increase 4.6% * 100,000 = $4600. Because they
pay $15,000 in AMT, this "tax increase" would mean they'd pay
$4600 less in AMT and $4600 more in regular tax. The net
effect of the "tax increase" would be zero.
Using my example, the tax increases that the experts are
predicting will have the biggest impact on folks making over
$600,000. But Kate and Joe, and a lot of people like them,
shouldn't worry about tax increases.
That being said, I might turn out to be wrong. Have you heard
the pundits peddling fear of tax increases admit that?
spend precious energy worrying about them.
A Kate and Joe were in yesterday. They are professionals
raising four kids, who, between the two of them, make around
$350,000 a year. They were bemoaning the fact that, according
to the media, their taxes are going to go up.
When we actually looked at their numbers, I had a different
prediction: their taxes won't go up. How could this be?
Please excuse me while I get a bit tax-geeky (and
simultaneously simplify the tax code and the political system
for explanatory purposes.)
$15,000 of the $120,000 Kate and Joe pay in federal taxes is
the dreaded "Alternative Minimum Tax" or AMT. While
Alternative Minimum Tax sounds appealing, it basically limits
the deductions of people who make between $200,000 and
$600,000 a year. It usually kicks in if you pay a lot in
property tax or state income tax and earn $200-600K. Most
people who are paying it don't know they're paying it and
don't care about the distinction between regular tax and AMT.
It's all the IRS to them.
However, if regular tax rates rise, before Kate and Joe would
actually have to pay more, their AMT would have to go down to
zero. For instance, if the top bracket goes from 35% to 39.6%
on people making over $250K, Kate and Joe's taxes would
theoretically increase 4.6% * 100,000 = $4600. Because they
pay $15,000 in AMT, this "tax increase" would mean they'd pay
$4600 less in AMT and $4600 more in regular tax. The net
effect of the "tax increase" would be zero.
Using my example, the tax increases that the experts are
predicting will have the biggest impact on folks making over
$600,000. But Kate and Joe, and a lot of people like them,
shouldn't worry about tax increases.
That being said, I might turn out to be wrong. Have you heard
the pundits peddling fear of tax increases admit that?