Ask Uncle Bill

Jonathan Clements and the Nine Commandments-Number 9

And the final one is--

Number 9--Overconfident investors misjudge not only the markets, but also themselves.

It is easy to talk tough and act brave when the market is going up.  It's a completely different story when prices are headed the other way.

The reality is, until you have been through a brutal bear market, with your portfolio deeply underwater and everyone around you filled with doom and gloom, you won't truly know how much risk you can tolerate.

Self-confident, decisive action may serve you well in the work world.  But in the financial markets, it will leave with a fistful of disappointing stocks and a longer road to retirement.  My advice?  Try humility.

Bummer.  Humility is no fun.

Try this instead.  Always worked for me, especially when I had a long time horizon, like you, for investing.  If stocks were going up, I would consider the ramifications of getting out.  Taxes, taxes, taxes, and penalties.  Better to think since they are going to go up, they will continue to do so.  So I would ride them.

If  stocks went into a slide --stocks have a tendency to go up slowly but to go down quickly so slides are more like going off a cliff.  You don't really have time to sell.  Some people say they do but note what Louis Rukeyser said the day after the largest single day loss in history in 1987--"Today there are two types of people on Wall Street-those that lost money and liars."  Truer words never spoken.  So if there was a slide or collapse, I would sit back and say, "Too late."  Then I would return to the work world saying I would see it coming next time and get out.

Which never happened.  Which is good because you can't time the market.  Get in and ride it.  You have the time.

So that is it, finally, for Jonathan Clements.  Until Sunday anyway.

A few tips on giving at this time of year-- Give something of yourself rather than just going to the mall.  And if your future partner cannot handle money at this time of the year, consider finding a new partner.  Merry Christmas.

Jonathan Clements and the Nine Commandments-Number 8

Reassuring investment advice--

8--We all tend to think we're better than average drivers, pretty good looking and smarter than most.  This overconfidence spills over into our investing and fuels our headlong pursuit of market-beating returns. 

Yet this is almost always self-defeating.  Trying to beat the market typically involves a heap of investment costs, and those costs mean our efforts to beat the market usually fails miserably.  Indeed, you will probably fare far better by sitting quietly with a handful of low-cost mutual funds, preferably market-tracking index funds.

But it isn't just that efforts to beat the market are usually self-defeating.  They are also unnecessary.  Want to retire rich?  All it takes is time and regular savings.

I told you finance was easy.  Set it and forget it. 

A major foe, if not the major foe, of making money is expenses.  Also, known as transaction costs.  The more you trade, the more you use a broker, the more you use load funds, the more you use no load funds with high fees, the more you LOSE.  Activity requires effort and the broker, banker and candle stick maker all require payment.  You, the customer, pays.

On the other hand, index funds do not require a lot of effort on the part of the fund company so they have the lowest expense ratios.  Finally, you have the guy ingredient that makes investing in low cost funds-TIME. 

Use TIME and dollar cost averaging (regular contributions) to make you rich.  Check out Category 12 for details.

Jonathan Clements and the Nine Commandments-Number 7

Back to Jonathan and this is the most important one so pay attention.

7 Buy Yourself Options

This burgeoning wealth could come at just the right time. 

At age 22, your career may fill you with excitement.  At age 42, the excitement will likely have faded and you may be hankering for a change.  If you have money, you have options. 

What if you have little or no savings?  Put it this way: It's pretty depressing to be in your 40s, stuck in a job you hate--and knowing it will be decades before you can escape.

What is the most important sentence in that section?  All together now---If you have money, you have options.  Tatto that on your eyelids so you see it every time you blink.

You will need options.  Oh, you can 'live' without them but you will be subservient to your boss, your job, your bank.  You want options because someday,  somebody or something will happen and you will have to make a really big decision that will impact you and the people you care most about.  If you have money, you have options.  If you don't have money, you can't make that decision--you can only accept the consequences of somebody (your boss, the bank, somebody) making the decision for you.  You will have no say.

In business it is known as Screw You money.  (Actually it is known as something else but this is a family show.)  Somebody is trying to make you do something you know is wrong--illegal, immoral or just not good for you or your family.  You think it over, weigh the pros and cons, and finally say SCREW YOU.  If you don't have some money, you can't say anything. 

A REALLY Stupid Idea

Have to take a break from Jonathan this morning to tackle something that is politically attractive but financially stupid.  Finance and attractive ideas usually don't mix because attractive ideas (take your pick--minimum wage, universal health care, subsidized housing) almost always don't make finanicial sense.

So at the risk of being a Scrooge at this time of year, here is another really stupid idea.  The quote from this morning's paper--

Alarmed by a rapid rise in student debt, Democratic leaders in the coming Congress are promising to lower payments on new college loans by cutting the interest rate in half.

This makes about as much sense as trying to cut back on drug use by cutting the price of cocaine in half.

But first some facts.  Seems the Dems want to cut the rate from 6.8% to 3.4%.  And how do they do this, wave a magic wand?  If the going rate is 6.8% (pretty low, historically) and the Dems want to cut it in half, than again, how?  No bank or lender is going to go, "Hey, you are right.  The rate is too high for those poor college kids so we are going to cut it in half."  They are going to say, "Hey, the rate is 6.8% and if you want the rate to be 3.4% then somebody, you, are going to pay the other half."  But who is "you."  You is the government.  Oh, great, let the government pay.  But the government is us which means taxpayers which means higher taxes.  Great.  When you see a deal like this, always try to figure out who the YOU is.  It is usually you.

But you heartless jerk, give the poor kids a break.  The paper then trots out the 'victim.'  In this case it is "Nikki Schwartz, a University of Minnesota student who has racked up $66,000 in debt after five years of college and figures that she'll owe $200,000 when she finishes graduate and law school." 

Whoa.  Whoa.  $66,000-I would like to see the breakdown of that number.  I just put my daughter through a state school for $40,000.  How did Nikki spend $66,000?  Well, one reason is taking five years.  College is four years, Nikki.  Then she wants to rack up $200,000 going to graduate school AND law school.  Nikki says "I would love to to see the interest rates go down."  You think.

Ok, ok.  A little too rough on Nikki.  But c'mon.  Actually, the real culprit isn't Nikki, it is the schools and the existing system of student loans.

There is no industry that has the pricing power of higher education.  Let's say you are the CFO of State U.  Your chancellor and faculty want 1) raises, 2) a new engineering building, a new lab, a new libary, a new liberal arts building 3) more importantly, a new football stadium and 4) most important of all, a new football coach at $2 million plus a year to beat the old conference rivals. 

You as CFO, say No Problem.  Because you can price your product to pay for all this and more because your customer gets cash from the government...oopps, the taxpayer. 

Here is the whole mess boiled down into two numbers--1) over the last five years, the median household income has declined by $1,300 while 2) tuition at the average four year PUBLIC college rose by 57 PERCENT.

See what I mean by pricing power.

Now the CFO is really licking his chops because it is going to get better.  Now the goverment will increase the customer buying power by half.  Get out the bubbly--Christmas is coming early this year. 

Maybe it won't happen.  Not likely.  Hear this from Rep. George Miller, D-California, the incoming chairman of the House education committee, "The price of tuition should never stand between a qualified student and a college degree."  Sounds nice?  Sure does. 

And it's money in the bank for the guys in the education business.  Get out the bulldozers and build that new stadium.  New coach?--go for $3 million. 

Don't worry about paying for it.  Done deal.

Hate to be a smart ass but this is exactly what is going on.  How to fix it?  Beats me, this egg is scrambled.  But if I were a parent, I would be saving more and hoping Junior can get a tryout with that new coach.

Jonathan Clements and the Nine Commandments-Number 6

This is a big one--Pay attention.

Number 6

As soon as you enter the work force, start saving and investing.  Initially, your financial progress will seem agonizingly slow and the sacrifice involved will hardly seem worth it.

But if you sock away 10% or 15% of your salary every year for 10 or 15 years, you should hit critical mass-and suddenly your portfolio will start growing by leaps and bounds.

Truer words never spoken--and usually routinely ignored.  It's that inertia thing again.  Hard to get started. 

Once started though this thing is hard to stop.  Clements calls it growing by leaps and bounds.  I look at it more like a snowball going downhill--once started, it cannot be stopped.  But this is so boring because for years it just kind of sits there and years, when you are young, are like light years.  A year takes forever so who cares about investing?

As noted too many times to even think about the best way to get over inertia is to set up a plan and forget about it.  Go to Human Resources and set up the old 401k.  Unless you work for the Post Office or the military, it is the only retirement package you are going to get.  SO GET IT DONE.

On the after-tax side, call Vanguard or Fidelity or your bank or somebody and set up an automatic hit to your checking account on payday.  Make it some amount you can live with and then forget about it.  (Just thought of Capital One--they have a no minimum balance deal.)

Go about your way.  Check on the money whenever you feel like it.  But don't obsess.  My wife used to call it 'no good money' because we didn't touch it.

But remember what a few people have said regular investing.  Albert Einstein called compound interest the "eighth wonder of the world."  Samuel Bronfman said the "First million was a lot of work, the second million was inevitable."  The same goes for smaller amounts of dollars.    

Jonathan Clements and the Nine Commandments-Number 5

5 Valuable Lesson

If you can develop some financial competence, you will save yourself a lifetime of heartache and a heap of money.  Suppose that, over the course of your adult life, you have an average portfolio of $250,000.

If you use a broker or financial planner, you might pay the adviser 1% of that sum each year, or $2,500.  That is $2,500 you would save if you learn to manage your own money.

Maybe more important, by learning to build your own portfolio and pick your own mutual funds, you will have that comforting sense of control that comes with fully understanding your finances.

Agree with Jonathan completely. 

Also, at your age it will never be easier.  Sign up for your companies 401k, invest in index funds roughly 60% S&P 500 Index, 20% International Index and 20% Small Cap Index. 

Stay away from the Merrill Lynchs of the world.  They charge a lot of fees and like to sell you the hottest new thing for which the broker will get a huge commission.  Actually, you don't have to worry about them at this stage--you don't have enough money to interest them.

For your after-tax accounts, save up an emergency fund of $3,000 in a money market, Vanguard or Fidelity.  After that save up for a specific purpose like a new car or house keeping the money safe in a money market fund as well.  If you don't have a specific goal for the short term, invest the money in the same 60, 20, 20 formula above.

For more details, read Category 12--Investments-All You Need To Know.

What Jonathan doesn't mention here is the largest impediment to making money--intertia.  Or, I'll get to it tomorrow.  Not tomorrow, today.  Set it up and forget it.    Money that is not  saved for tomorrow is usually spent today.   

So get going.  Call Vanguard or Fidelity or TRowe Price and talk to them.  Or go to their websites  and get comfortable.  Find somebody at work that seems to know what they are doing and talk to them.  Or write me.  Just do it.

Jonathan Clements and the Nine Commandments-Number 4

Here is Number 4---

Buy Right

I am not suggesting that you constantly defer gratification and that you always pinch pennies.  This isn't just an unpleasant way to lead your life.  It can also be shortsighted, especially when it comes to possibly the biggest financial decision you ever make: buying a home.

If you are purchasing a house in an area where you foresee staying for a long time, consider stretching to buy the home you really want, even if it is a little more expensive than you can truly afford.  The fact is, trading up is enormously expensive, so your best bet is to buy the right house the first time around.

I think Jonathan is being a bit simplistic here.  If you are a first time home buyer you are already, I believe, going to be "stretching to buy the home you really want."  Because if you are like me you want the best value for the "home you really want" and value usually means something is already expensive.  This is never more true than in housing.  If you have any questions about that, book a trip to San Francisco.

The most overworked cliche about housing is "Location, location, location."  But true.

So find your house based on the following criteria--the property must maintain or increase in value as a result of good schools, good location (there's that word again) and demand.  And that spot will be expensive. 

There is no time in your life when you need to be more financially sharp, innovative, and cut throat.  Cut throat in the sense to bargain and find  bargains.

The strategy for doing this is already laid out in Category 9--Buying A House For 30% Off.  Read it, develop your own strategy, and implement.  Any questions, just let me know.

Jonathan Clements and the Nine Commandments-Number 3

Jonathan Clements continues--

3) Save Yourself

All of this is a reminder that the secret to financial success isn't much of a secret:  You've got to spend less than you earn.

And, no, you won't be missing out.  You may get a brief thrill from the new sofa or the faster car.  But, as everybody eventually learns, the thrill doesn't last and soon enough you are lusting after something else.

Indeed, it is one of those basic life choices:  You can spend your days chasing after material goods that will always ultimately disappoint--or you can step off the treadmill, reduce your financial stress and instead devote your energies to far surer roads to happiness, such as seeing friends, pursuing hobbies and helping others.

This is where I think old Jonathan goes off the reservation somewhat.  Hilary is probably tuning this out as well just about now.  Hilary maybe can get excited about a new car but not about a sofa. 

Jonathan is sounding a bit too much like a parent here; taking most, if not all, the fun out of making some money.  So let's take a look at things slightly differently.

Jonathan has laid down the univeral truth--spend less than you make.  Ok, so let's assume you have now paid in your 401k for the pay period, paid the rent and utilities, and maybe socked a little away in your after tax savings.  Not much but maybe a little.

Got anything left over?  If so, SPEND IT!  Go get that little thrill of buying something because as Bill Clinton paraphrased it, YOU CAN.  Life is not a hair shirt all the time. 

REWARD YOURSELF!  You kept your job, you didn't get arrested, you didn't get drunk and run your car into a telephone poll, you paid your taxes and you got some money burning a hole in your pocket.  Buy something you always wanted as long as it not a Ferrari. 

And pretty soon you will run out of things to buy.  But you will have some nice things.  Small but nice. 

More importantly you will have learned how to spend less than you earn and enjoy what you earned.  Hope that didn't sound too much like a parent.   

Jonathan Clements and the Nine Commandments-Number 2

Number 2 is--

Forget Appearances.

That brings us to the family down the road, living in the McMansion with the pristine lawn and his and her European sedans gracing the driveway.

You can't be sure the family has a boatload of money.  But you can be absolutely certain they've spent a boatload.  In fact, the cars may be leased, the house may be fully mortgaged and the couple may spend their evenings huddled over the kitchen table, sweating over how they will pay the bills.

Amen, brother Clements.  Actually this description reminds me of something I just heard the other day about an executive at my former company getting canned.  Won't go into the mechanics of it but good jobs that pay well are hard to find and if you are planning on that job always being there, you may be planning on disaster.  Don't know this guy's financial situation but he spent a lot of money (and he leased all his cars) and I have a general idea of what he made so he won't be hurting, maybe, but the gravy train just came to a screeching halt.  Gravy trains have a way of doing that so don't go overboard when you hit the big time. 

Also, appearances require 'stuff' like the McMansion, the vacation home, the cars, the taxes, the private school and, if you think your kids are going to appreciate it, think again.  Delbert McClinton has a song called "Too Much Stuff" with the basic premise being that 'too much stuff' leads to too much hassle and losing sight of the important things, whatever those are to you. 

On the other hand, you don't have to live in a cave.  Just find a balance.  If you spend more than you make, then you have not found balance.  If you spend less than you make and can save some, you have found balance.

I have become so sick of thinking about 'assets' like cars and property and investment properties that my goal is to own nothing that can not be traded on the New York Stock Exchange.  Won't get there but I'm getting close.

Jonathan Clements and the Nine Commandments

Sorry about not posting on Friday but drove Buck back home to Bossier City and played in the Barksdale Air Force Base Holiday Benefit Golf Tournament.  The tournament is put on by officers to raise money to buy plane tickets for Airmen who do not have the money to get home for Christmas.  (A quick note---the Air Force has not surrendered completely to political correctness as Airmen are enlisted rank of either sexes.)  I got drafted into playing as Marc got drafted into running the thing and he did a pretty good job raising about $5,000.  But it was cold in Bossier City and I'm still trying to get warm.  ( Another note on political correctness---the benefit used to be called the Christmas Benefit Golf Tournament and then changed several years ago to Holiday.  The golf pro said the turnout got cut in half.  Seems a lot of people still like Christmas as opposed to Holiday.)

Anyway, got back and read the business section of the paper yesterday which pays the Wall Street Journal a lot of money to use their stuff.  The only 'stuff' of any real value is Jonathan Clements column and this one started out--

"In 1985, I graduated from college.  This past August, I dropped off my daughter Hannah for her freshman year.  Despite the two decades in between, I can still vividly recall the financial struggles of early adulthood, including grappling with credit card debt, scarmbling to come up with a house down payment and watching as one of my stocks plunged 80% in a few short months."  (Been there.)

"Hannah, of course, will have her own financial struggles, and those will teach her far more about money than I ever could.  Still, there are nine key financial insights I'm hoping to pass along--and most have precious little to do with picking stocks and buying mutual funds."

I have the feeling that old Jonathan is a pretty good dad who has the financial thing pretty well figured out.  He is also pretty sick of saying the same thing over and over again but, hey, it's a living.  We will take a look at the Nine Commandments and elaborate a little.

Number 1-More Isn't Always Better

Money may not make you happy.  But it could make you desperately unhappy.  Lots of folks stagger through life, buffeted by credit card debt, unpaid bills, and gnawing fears about their financial future. 

Sure, these worries are more likely to hit those with lower incomes.  But don't kid yourself: Collecting a handsome salary won't necessarily save you from financial stress.  How you handle money is far more important than how much you earn. 

Amen, Jonathan.  Money won't buy you happiness, that is for sure as outlined in this poem I was reminded of the other day. 

WHENEVER Richard Cory went down town,
We people on the pavement looked at him:
He was a gentleman from sole to crown,
Clean favored, and imperially slim.
And he was always quietly arrayed,
And he was always human when he talked;
But still he fluttered pulses when he said,
"Good-morning," and he glittered when he walked.
And he was rich—yes, richer than a king,
And admirably schooled in every grace:
In fine, we thought that he was everything
To make us wish that we were in his place.
So on we worked, and waited for the light,
And went without the meat, and cursed the bread;
And Richard Cory, one calm summer night,
Went home and put a bullet through his head.

When I first read that way back in high school it knocked me over.  The guy has everything and then blows his brains out.  Ok, so there is the downside of being rich.  On the other hand,  here is the upside by another author--

The trouble with being poor is that it takes up all of your time.

And that is what Jonathan Clements is talking about.  You can't write the great American novel, love your wife or husband or partner or your kids, start your own business, paint a picture, climb a mountain, run a marathon IF you are always worrying about money.  So do what Jonathan is saying--make enough money to pay for the basics and not worry about them.  Manage debt so it doesn't manage you. 

Money will not buy happiness but the lack of it will buy misery.  As Dorothy Parker said, "I've been poor and I've been rich.  Rich is better."

Tomorrow, Commandment Number 2--Forget Appearances.