It may be old age creeping on, but I seem to increasingly find my financial advice advocating moderation — a balance between two more extreme courses of action. The following are several examples:
- Personal budgeting. I’ve been known to be an obsessive planner, but I don’t actually have a household budget. I take more of a big-picture approach — I only make a certain amount of money available in my checking account, and I keep my spending within that limit. If I started to bump up against that limit, perhaps I’d have to get out a sharp pencil and decide which expenses could stay or go, but I think working within a strict limit has forced me to summarily dismiss the idea of expenditures that would conflict with that limit. This has worked out to be a good saving strategy. After all, when people budget, they tend to come up with a list of things they need or want and then figure out how much they will spend on them. That approach seems to presuppose that you will get all those things. If you start with a limit that forces the rest of your income into savings, you may have to make do with a shorter list of expenditures, but you’ll have a larger savings account in the long run.
- Bargain hunting. I focus my bargain hunting on big-ticket items and on recurring expenses, because these are the things that will make the biggest difference. I do not spend as much energy hunting nickel-and-dime bargains. Just after college, when I was very poor, I remember walking an extra mile to go to a store where macaroni and cheese was 6 cents cheaper than at a nearer store. However, I think one of the rewards for earning a better living these days is being able to relax about shopping tactics that yield minor rewards.
- Tax strategy. My accountant gets a little grumpy about the fact that I don’t track my business expenses in detail. The reason? I know those expenses don’t add up to much. I think if I tracked everything throughout the year, I might save $25 or so in taxes. I will gladly pay that $25 in order not to have to keep a painstaking log. I certainly take my bigger deductions and avoid unnecessary tax liabilities, but my idea of moderation is drawing the line at things that just are not worth the time.
- Asset allocation. One school of thought is that asset allocation should be set based on your investment goals, and that you shouldn’t deviate from that policy allocation lest you be out of the market — or too heavily in the market — at the wrong time. At the opposite extreme, market-timers claim to be able to enhance returns by avoiding bear markets, but this approach can easily have the effect of magnifying risk rather than return. I believe that there is room for varying asset allocation according to market circumstances, but you should have parameters — say a 20- or 30-percent range — within which those allocations are maintained.
- Fiscal politics. I still laugh about the Laffer curve — not the idea itself, but the way it tends to be misapplied. Anti-tax advocates like to talk about the part of the curve that demonstrates how tax revenues will actually increase as tax rates are lowered, because there will be greater earning incentives and more money staying in the economy. What they don’t tend to mention is that there is a point where this process reverses, and lower tax rates start to yield lower revenues. After all, a zero percent tax rate would yield zero revenues. The tricky part is finding where the optimal tax rate is. Unlike some European leaders, I’m quite sure that optimal rate is below 50 percent; but also unlike anti-tax advocates, I’m guessing that the optimal rate is closer to 50 percent than it is to zero.
Probably the only area of finance where I don’t represent the middle ground is with regard to debt. Whether it is the government or individuals, the routine increase of indebtedness over time is a dangerously unsustainable habit. Unfortunately, the marketing of credit cards and loans is big business, and the Federal Reserve has actively sanctioned increased borrowing by lowering interest rates.
The result? Earlier this year, total consumer credit passed the $3 trillion mark for the first time ever. You have to wonder how many people who criticize our huge government deficits — which are certainly outrageous — have out-of-control credit card balances and other debts themselves.
So, a reasonable and moderate viewpoint would be that personal debt is okay as long as you can meet your payments. However, when you see how that attitude has mushroomed into $3 trillion in consumer debt, perhaps it’s time for individuals to take a less tolerant approach to their own borrowing.
Was Charles Dickens particularly ingenious when he came up with the legendary character Ebenezer Scrooge? Was Dr. Seuss at his creative best when he unveiled the Grinch? Did director Frank Capra and the others involved in assembling the classic film “It’s a Wonderful Life” experience a lightning bolt of inspiration when they dreamed up old man Potter, that conniving rotter?
The answer to all three questions is “no,” topped by a holiday bow, emblazoned in wrappings of green and red and tied up with a festive ribbon.
No, to create all these immortal, household-name miserly holiday villains, all Dickens, Seuss, Capra and his writers had to do was be inspired by a breed of real people whose greatest joy is embarking on cash grabs through devious means.
This type appears annually around this time of year to appeal for holiday season and end-of-year charitable donations for the organizations they represent.
Folks from coast to coast, touched by emotional appeals at a time of holiday giving, dig deep in their pockets for donations to help less fortunate people, fund disaster relief, care for sick and injured animals and cure childhood cancer.
The only problem with these heart-tugging requests is the charitable organizations being touted are as fictional as the village of Pottersville. In many cases, they sound like real charitable organizations known to everyone. But they are in reality the creations of people intent not on assisting the less fortunate, but on lining their own pockets with as many free greenbacks as they can hoist.
Says Daniel Borochoff, president of Chicago-based CharityWatch, which rates and evaluates charities to help folks make more informed gifting decisions: “Just about anyone can set up a charity, implement a website and send out letters and solicitations that pull at the heartstrings. Some are quite expert at this. Many of them simply look at this as a business decision.”
Like most of us, you may see the holidays as a time of giving and want to assist less fortunate people with your charitable dollars. But as the description above suggests, if you want to make sure your gifts go to organizations that really help people, animals and causes, you must to do your homework.
After all, you research the best credit cards and best savings accounts. Why wouldn’t you also research the most efficient charities?
The fact so many fraudulent charity organizations exist is only part of the reason to do your due diligence before taking out your checkbook. Another is that a large percentage of donations to even some of the better-known legitimate charities wind up going not to those who can benefit, but to fundraising organizations and administrative staff that rake in the donations.
As Borochoff told me recently, big-hearted donors are often swayed by emotion and give to bad charities. That helps these organizations vacuum up billions of dollars, in turn giving rise to even more suspect charities. Still, it’s not easy for a donor to effectively investigate charities on her own. For instance, the financial reporting of a questionable charity may be handled in a way that makes it seem the charity is operating efficiently and puts donations to good use. But even though the organization is following generally accepted accounting principles, donations aren’t going to people in need.
Happily, CharityWatch, Glen Rock, N.J.-based Charity Navigator and Washington, D.C.-based GuideStar can help ensure worthy groups get donors’ gifts this season, and scam charities — deservedly — get lumps of coal.
Proactive, not reactive
The first and most important thing you can do to help make sure your cash gifts are put to good use is to stop being reactive, and start being proactive. “One of the big things is telemarketing appeals for charitable donations,” says Sandra Miniutti, vice president of marketing for Charity Navigator.
“We tell people to simply hang up the phone. Even if there is a legitimate charity behind that call, they’re employing a for-profit telemarketing firm, and that firm may be taking 80, 90 or even 95 percent of your contribution.
“We’re trying to get donors to do is be proactive, not reactive. If you are proactive, you are less likely to be entrapped in a scam.”
(There’s another emerging reason to avoid telemarketing appeals, and that is “spoofing” technology, in which software is used by scammers to display the name of a legitimate charity on your caller ID as a way of stealing your cash.)
Miniutti advises flipping the process upside down. Instead of reacting to charities seeking your donations, proactively seek great charities doing the work you wish to support, whether they’re improving the environment, helping needy kids, paying for pets’ medical care or working to cure diseases.
At www.charitynavigator.org, you can search for charities and quickly determine how they rate on a zero- to four-star rating scale, Miniutti says.
At www.charitywatch.org, you can find top-rated charities in 36 different categories, including cancer, animals and the environment. And, Borochoff says, “In every major crisis we will post information about the best ways of helping people in that crisis.”
Finally, www.guidestar.org gathers and disseminates information about every single IRS-registered non-profit organization.
By doing your part, you can aid a much larger effort. “The number of charities is increasing, [and] the level of donations is not keeping pace,” Miniutti says. “So it’s critical we invest our donations into the charities that are high performing, so they’re not starved out of existence.”
That’s a sentiment even the Grinch would find hard to debate.
All of us, I’m sure, are busy shopping and planning for gifts for all the people we care about. In the process, we don’t want to end up in a situation where we are happy for just one month and but are left paying December’s credit card bill throughout the next year. So here is my list of money-saving tips for the holidays. A lot of us have smart phones and there is an app for pretty much everything. With a little planning you can save money, reduce stress and have a fun-filled holiday.
- Make a budget and stick to it: If you have already made a holiday budget and been saving for it throughout the year, excellent! If not, make a budget now and include everything.
- Make a gift plan: Create a gift plan with the list of all recipients and ideas for gifts. If you don’t have ideas, write down their interests, which might lead you to find something. Include a maximum dollar amount. As with everything these days, there are many apps for creating and tracking a gift list. Pick one with good reviews and update it as you shop so that you won’t lose track of it.
- Give gifts only for the kids in the family.
- Comparison shop: Know prices before you get out of the house. If you have to go on a “pre-shopping” trip, so be it. Don’t buy anything on this pre-shopping trip. Just note down the prices for all the gifts in your list and go home and check the prices online along with how much it costs for shipping. This will give you a better idea of the price range and the best place to buy. There are several websites that allow you to track the price for the items on your list. I use Camel Camel Camel to track Amazon prices. Don’t forget to get points either using your credit card or using an app like Checkpoints that offers points for just checking in.
- Look for deals and sales: If you are buying online, Google [store name + "coupon"]. You will end up with some coupons. Even if it is just for free shipping, you are saving money. Shop on Free Shipping Days to get any minimum purchases to get free shipping. Make use of the holiday events like the BabysRUs first Christmas to score some free stuff for yourself or to gift.
- Buy in bulk: For commonly used items like holiday treats or baking supplies, try to buy in bulk along with a neighbor, family or a friend.
- Homemade gifts: Instead of buying gifts, make your own.
- Don’t be afraid to re-gift: This is a very personal decision. If you feel comfortable with the idea and you have a perfectly good gift that is just not for you, consider gifting it to someone who will make use of it. Save all your receipts in one place in case you have to return something. Apps like OneReceipt or Shoeboxed can help you keep your receipts organized.
- Give time: Give your time instead of money or a gift.
- Get a part time job: If you can spare some time, consider getting a part-time job in a department store. You could make some money for the holidays and also make use of the employee discounts for all your gifts.
- Wrapping paper: Instead of buying wrapping paper, make your own with your kid’s artwork.
- Make ornaments: Similar to wrapping paper, instead of buying expensive ornaments, make ornaments from your kid’s artwork or with some meaningful photos.
- Food drives: Instead of office gift exchanges, suggest a food drive where you can bring canned and non-perishable food for the local food bank. This won’t save much money, but at least you are not stuck with buying a lame gift for a coworker you don’t even know very well.
- Pot luck: For parties (whether you are attending or hosting) suggest pot luck instead of just one person doing all the cooking and cleaning. It can save serious time and money.
- Pick your parties: Attend the parties that are more meaningful to you and skip the ones from an acquaintance or coworker you don’t know well.
- Plan your vacations: Traveling a day earlier or later can save a lot of money.
- Skimp on outdoor lighting: Consider going light with the lighting. You can also use LED lights. They have significantly lower energy consumption so you won’t get stuck with a humongous power bill in January. You could also change regular bulbs to colored ones to add a festive effect and leave it at that.
- Don’t replicate your parents: This is one of the mistakes I make, not with just holidays, but in general. I forget that it took my parents probably 50 years to collect all the stuff they have. I am just starting out, so there is no need to have it all the first time.
- Buy throughout the year: It is not possible to do this for this year, but the best time to shop for Christmas is the week after Christmas when everything Christmas-related goes on clearance. Stock up on stuff that won’t get spoiled — decorations, ornaments, gift wrapping and even gifts.
- Buy gift cards using the holiday deals and give yourself a gift too: Holidays are a great time to buy gift cards at a discount. I stock up on gift cards for my own use the following year during this time.
What are your favorite money-saving tips? Do you have a weakness or do you always plan well?
This post comes from Lindsay Meredith at our partner site Quizzle.com
The holiday shopping season will be in full swing before you know it, and, if you’re like many Americans, you’ll be making your special purchases with a credit card. After all, credit cards are a safe and convenient way to shop, plus they off special protections on the stuff you buy, like extended warranties and insurance.
What could go wrong?
Actually, a lot. Credit cards might be one of the most popular ways to shop, but for many people they represent an opportunity to get into serious financial trouble. It’s important to be careful with plastic, especially during the holidays, when many of us let our guards down and throw fiscal caution to the wind.
This year, be sure to keep your credit – and sanity – in check by avoiding these ten credit card pitfalls:
1. Piling On Debt
Not only will charging too much on your cards result in seriously expensive interest charges, it will also hurt your credit score. Thirty percent of your score is determined by how much debt you’re carrying, so make sure you control your spending this holiday season – or your spending will end up controlling you.
2. Forgetting About The Bills
The holiday season is often busy and rushed, but it’s important to remember to pay your credit card bills on time. This is because the largest portion of your credit score – 35% – is derived from your history with paying your bills on time. This means it’s critical to make paying your holiday bills on time a priority.
3. Falling For Credit Card Gimmicks
At this time of year, many credit card companies offer “teasers” to try to get new business. These gimmicks often take the form of interest-free periods or special rewards, are meant to capitalize on our propensity to overspend at this time of year. Don’t fall for it! The last thing you need is to end up stuck with an extra card to keep track of that you don’t want or need.
4. Making Minimum Payments
Making minimum payments on your credit cards in order to conserve cash for other holiday expenses might seem like a great idea, but it will end up costing you. Not only will you end up paying through the nose in interest, you’ll also probably end up building up debt that will be hard to shake. Never pay just minimums, not matter how tempting it might seem.
5. Opening Too Many New Cards
Opening a new store credit card might save you a bundle on your first purchase, but just be careful not to open too many retail cards. This will make it harder for you to keep track of your spending, and will also cause your credit score to drop, so be careful to keep your new credit inquiries to a minimum.
6. Maxing Out Your Cards
Maxing out a credit card is a sure-fire way to kill your credit score, and it’s also an easy way to end up with a big bill you can’t pay. Be sure to avoid exceeding 30% of your available credit, and pay off your balances as soon as you can.
7. Not Tracking Your Spending
One of the great things about shopping with credit cards is that it’s easy to track your spending online – however, a lot of people get into trouble because they neglect this simple step. Be sure to keep a close watch on how many purchases you’re putting on the card, and if your spending starts to get out of control, reel it in fast!
8. Giving Your Card To Someone Else To Use
It might seem convenient to give your credit card to a friend or family member and ask them to pick up a few things for you, but this move could get you into trouble. After all, it’s hard to know exactly what they’ll buy, and there’s always the possibility they could get out of control. No matter how busy you are, don’t send someone else out to do errands with your credit card – you could come to regret it.
9. Saving Your Card Info On Too Many Sites
Online shopping has made it really easy for us to pick up our favorite products without having to leave the house – in fact, it’s almost too easy. Avoid saving your credit card information on too many sites – you’re opening the door to overspending in the future.
10. Not Taking Advantage Of Credit Card Rewards
Many credit card companies offer special rewards on a rotating basis, and some of the most generous deals come at the holiday season. Be sure to check in with your credit card company to see what they’re offering, and shop accordingly – you could end up saving some serious cash!
Shopping for the holidays doesn’t have to be a drag on your finances if you avoid the ten credit card pitfalls described above – consider them an insurance policy on your holiday cheer!
More stories from Quizzle:
A Long Life
Nobody knows for sure exactly when Black Friday began as an American tradition. Know-it-all site TIFO (Today I Found Out) credits the Macy’s Thanksgiving Day Parade as something the retailer did to draw shoppers to its store almost a century ago. However, the parade was (and still is) on Thanksgiving Day, when the store was closed, rather than the day after. So the parades couldn’t have been the draw for shoppers (who didn’t all have cars like today back in the 1920’s). Rather, according to the Wikipedia article on Black Friday, the parades marked the generally agreed upon date after which the advertising extravaganzas for Christmas shopping would commence.
The advertising, therefore, could have been what drove the shoppers to stores for holiday gift shopping — that, and the fact that many employers give their employees the day after Thanksgiving off. It’s easy to imagine the rest of the story:
There’s your imaginary average American family, stuffed to the gills with the traditional three F’s: food, family and football. The weather outside, while not totally frightful yet, is not picnic material anymore, either. Over a late breakfast (despite the food overload experienced the day before, we gotta eat again) everyone dives into the newspaper. Well, the reporters had the previous day off too, so there wasn’t too much news in the paper (funny how that works).
What the paper lacked in news, however, it made up for with scads and scads of holiday ads. So there you are, comfortably stuffed (again) with nothing to do and nowhere to go. No rocket science is required to predict the rest of the story. With more affluence, increasing automobile ownership and the rise of the mall, the day after Thanksgiving became the perfect day for holiday shopping and decorating.
And so it was that shopping on the day after Thanksgiving became a more popular pastime in the years of growing post-WWII affluence. Most retail stores were still downtown back then, and the growing crowds wreaked havoc on a city’s increasingly burdened downtown streets and infrastructure. It’s no surprise, probably, that Philadelphia is where Black Friday got its name. After all, it is the only city famous for booing Santa Claus.
Lest we be hard on the fine folks from Philly, it had to be a nightmare dealing with the increasing crush of humanity. When you have a big event like a football game, you have to deal with big crowds. But that’s different: it’s a discrete event in a single location, with infrastructure set up to handle the sudden large flow of people when the game is over. That crush usually lasts for no more than about an hour, and everybody is headed in the same basic direction. Aimless shoppers, who come and go in random patterns for a whole day, had to be a nightmare to deal with in cities not set up for sudden spikes in traffic.
Somewhere along the way, and nobody knows exactly when, shopping on Black Friday metamorphosed from a more leisurely post-turkey pastime to a more intense and aggressive exercise. Back in the early days, retailers could draw shoppers by simply announcing a wonderful cornucopia of newly invented goodies to stuff in Christmas stockings. As retail competition grew, though, stores had to make their offerings more and more compelling to draw shoppers to their stores. And so the Black Friday sales were born. They may have worked in the beginning, but nothing is easier for a store owner to do than match the sale prices of competitors. Again, the story is predictable. Just like the arms race of the era after World War II, retailers embarked on a Black Friday sale/discounting race.
The stakes grew when holiday shopping began to account for a greater and greater proportion of retailers’ total revenues for the year. (What does that say about our nation? We spend more on gifts than everything else. If we stopped giving holiday gifts, it would cause an economic shock far greater than the Great Recession just ended.)
In days gone past, Sears, Roebuck was the world’s largest retailer, built on offering variety and quality. In time, though, the nation became more bottom-line oriented and Walmart overtook it by focusing on discounts. No surprise, then, that it’s Walmart who set the standard for the terms of Black Friday sales: deep discounts, valid for just a few hours.
Until 2008, the first full year of the Great Recession. That’s the year one of their temporary maintenance workers got trampled to death in New York. You remember how it happened: Shoppers were so hell-bent on getting those discounts (“limited to quantities on hand”) that they refused to even step aside to allow helpers to get to the hapless victim. The nation was shocked at what it had become, because many asked themselves: What would I have done?
And so it is that Walmart, again, is taking the lead to move us away from that (now scary) tradition of celebrating the day after Thanksgiving by trampling each other to death in pursuit of a few pennies in savings. The arms race moved to opening earlier and earlier to avoid those deadly crushes, until opening hours backed into Thanksgiving Day itself. And now Walmart has moved its Black Friday discounts to a week before Thanksgiving. Other retailers, unwilling to be left behind in this new arms race, have decided to follow suit.
That move to commence Black Friday deals way before Black Friday itself has raised the question in many quarters: Are we seeing the end of Black Friday as we know it? In a recent article, Experian Marketing Services explored the possibility in depth, and that has been taken up by Time magazine and other mainstream media outlets. More consumers are looking for deals earlier, and savvy retailers like Amazon and Walmart are responding quickly to catch the early worms, forcing other retailers to follow their lead.
Indeed, it seems that Black Friday, as we know it, will eventually go the way of the hula hoop and 8-track. As the L.A. Times points out in this article, social change rarely happens overnight. But it does seem inevitable.
Main reason: The internet, not just as a retail channel, is now the place to get information on prices at brick and mortar stores. Websites like The Black Friday have sprung up to allow consumers to search out the best deals ahead of time, and that has put even more of a premium on moving the start date of awesome deals up, just to stay ahead of the competition (who, by the way, also scans these sites).
What will the nation do now the day after Thanksgiving? Work on figuring out its finances to avoid getting crushed in the next recession?
What will you do Friday?
This hard-charging stock market — up more than 23 percent for the first ten months of 2013 — has me regularly cautioning about the riskiness of what may be inflated prices. I think it’s an important message under the circumstances, but it’s hardly the last word about financial risk.
While the devastating impact of stocks falling from a great height is an obvious risk, there are other forms of financial risk which may be more subtle, but in the long run can be equally as damaging. The following are examples of financial risk which have nothing to do with a sudden drop in asset prices:
People who keep their money in savings accounts or Treasury bills are often referred to as conservative investors because their actions reflect a strong aversion to the risk of losing money. And yet, recent years have highlighted that too heavy a reliance on short-term, interest-bearing instruments can expose you to a very severe form of risk.
At the end of 1980, 1-year T-bills were yielding 14.88 percent, meaning they would pay $14,880 in interest annually on a $100,000 investment. Within just five years, though, that yield had been cut nearly in half, to 7.68 percent. This would reduce the annual income production of a $100,000 investment to $7,680, and the worst was yet to come.
Today, 1-year T-bills yield just 0.12 percent. That would produce a paltry $120 in annual income on a $100,000 investment. Now, suppose you had been investing in T-bills since 1980, living off the income and rolling over the principal. As a result, you would have seen your annual income cut from $14,880 to $120. You wouldn’t have lost a dime of principal, but I think you’d feel as though you’d definitely been exposed to a damaging form of risk. That’s interest-rate risk.
Anyone who lived through the 1970s and ’80s probably has some memories of what inflation risk is like, but recent decades may have made people more complacent. That’s just when inflation risk can strike.
Since 1989, inflation has grown at a compound annual rate of just 2.71 percent, so it hasn’t really been a problem. Similarly, from 1939 through 1969, inflation averaged just 3.29 percent a year, so it wasn’t a frequent concern. However, for 20 years immediately after that, from 1969 through 1989, inflation averaged 6.28 percent a year. In short, it can flare up when it seems to have been long dormant.
Those percentages may not adequately illustrate the difference these inflation rates can make, so consider this: At a 2.71 percent annual inflation rate, it will take about 26 years for the purchasing power of your money to be cut in half; a 6.28 percent inflation rate will cut your purchasing power in half in less than 12 years.
I’ve seen people take career risk in two forms. One is when someone’s career seems to be sailing along, and all of a sudden they get the carpet pulled out from under them. They lose a job, perhaps for reasons beyond their control such as a change in management or problems with their employer’s business. Suddenly, 20 or 30 years into a career, people in this situation find they can’t come close to replacing their former level of income.
The other form of career risk starts a bit earlier in a person’s career — usually to confident people who experience success early on. They take on expenses they can’t quite afford — a big mortgage, payments on a fancy car, etc. — on the assumption that continued success will bring them higher and higher levels of income as the years go on. Unfortunately, the economy just hasn’t been that generous in recent years, so these people find themselves trapped in an unsustainable lifestyle.
Everyone is at risk of career setbacks or disappointments, so never let your spending get ahead of your income. Also, keep your network of contacts and your job skills fresh. You never know when you might need them.
This could be the last risk you ever face — and it may seem counterintuitive until you experience it. This is the risk of living too long.
Retirement plans often fail to adequately prepare for today’s longer lifespans, let alone the fact that roughly half the population will exceed the average life expectancy. Plan to make your retirement spending as sustainable as possible, even beyond your expected lifespan, so you won’t be caught short.
Some people describe themselves as risktakers, and some as risk averse, but the truth is that we all take on some form of financial risk. We simply get some degree of choice regarding which risks to take. What you perceive as risk depends on your experience, and on your current situation. These perceptions can be instructive to others, so please share with us what you see as your greatest financial risk these days.
I was listening to my favorite personal finance radio show one recent Sunday morning, when the program host uttered a prediction that virtually knocked me out of my chair. The affable star of the show, who helms one of the nation’s best-known and most successful financial advisories, clued listeners in on his conviction the Dow Jones Industrial Average would hit 150,000 by year 2030.
And if not 150,000, he predicted, it would at the least stand at 100,000 by then.
After reaching for a dose of smelling salts and regaining hold of my seat, I started processing this information. A Dow at 100,000 at least? That would make a boatload of people, quite possibly myself included, tons of cash.
I launched a search for comparable predictions, and discovered that in recent years there’s been no lack of forecasts the Dow would touch that nice round six-figure sum in the course of many of our lifetimes. Of course, they were matched by a like number of pronouncements that the prediction is sheer folly.
I don’t imagine anyone will be surprised to learn that many forecasts of Dow 100,000 were made by people who stood to gain by convincing people to invest in the stock market. Nor would any be jolted by the realization many Dow 100K naysayers are folks proud to proclaim they have every penny in cash.
Considering the Dow, as I write this, is struggling to climb above the 16,000 threshold, a prediction of 100,000 takes a certain willingness to be ridiculed. But those advancing the theory argue that their claims are backed not by pipe dreams but by careful study and solid theory. Let’s probe a few trends that could bring us face to face with this majestic milestone in the next two or three decades.
Game-changing advancements like 3-D printing, the Internet of Things, wearable computers and other Sci-Fi-like inventions are likely to speed the pace of techno-change. For instance, no one knows what will happen when 3-D printing, via which almost any object can be manufactured by printing it, replaces assembly lines. But many are quite sure it will make lots of companies and people billions.
Here in the United States, we’ve been beholden to the Middle East oil producers for generations. But with the comparatively recent discoveries of bountiful sources of oil right here on the North American continent, and new technologies to siphon it from the ground, those days are coming to an end almost as fast as one can say “OPEC rest in peace.” If there’s anyone who believes energy independence will be bad for the U.S. economy, I can’t recall hearing from them.
James Glassman and Kevin Hassett, authors of the book Dow 36,000, argue that stocks have long been undervalued, and that price-earnings ratios underestimate the power of good stocks to generate cash. Other folks assert the emergence of the BRIC countries Brazil, Russia, India and China will make more people consumers of American-made goods and services. Still others advance the TINA argument. There Is No Alternative, they say, that can currently make you the kind of money the stock market can.
Going out on a limb
I can imagine the blowback over my even bringing up predictions of the 100-thou Dow. “Oh, c’mon,” I can hear the doubters say. “You can’t believe that crap!”
Not that anyone cares what I think, but I’m about to throw caution to the wind, go out on a limb and boldly dare to deliver my own prediction. Will the Dow rise to six figures in the next 17 — or even 25 — years? Here is my fearless forecast.
Duh, I dunno.
But my own experience as a stock market investor may incline me to lean one way over the other. See, back in April 1987, I gathered up just about everything I could afford to invest, which in those days amounted to $20,300, and timidly invested all of it in a diverse grouping of mutual funds.
Six months later, on Monday, October 19, 1987, which came to be known as Black Monday (Black Tuesday in Australia and New Zealand, due to time differences), stock markets around the world imploded and jettisoned between 20 and 25 percent of their value in one single, horrible day. Well, I thought, there goes my life savings. I guess I just have to start all over.
I didn’t think there was much left of my $20,300, so I didn’t rush out of the market. And lo and behold, before I knew it, the market ricocheted back. And not that long after, I’d recouped my losses and earned some nice gains to boot. So I kept on dollar-cost-averaging into stocks for, let’s see, the next 26 years.
Here’s the thing. Where did the Dow stand at the end of Black Monday, 1987? Was it at 12,000, 13,000 or maybe 10,000? The answer is none of the above. At the end of that trading day, the Dow had fallen to 1,739. You can look it up.
Today, the Dow is 9.06 times what it was then. Apply that same multiple to today’s number, and you have a Dow at 142,713. Of course, that’s not to say that what’s past will be repeated in the future. But nevertheless, just as I intend to keep seeking the best savings accounts and best credit cards, I intend to continue to keep cash in the stock market, and to invest more into the market.
The one thing I can predict with absolute certainty is that lots of people will call me a fool for staying in the market as the Dow nears 17,000. How can I be so sure? They’re the same people who said that when it was 1,739.
I love the holidays. Family, fun, time off … somehow everyone seems to be more cheerful this time of the year, which makes me smile. But it also means more parties, entertaining, decorating and gifts. Adding a new house and a baby (and the sleeplessness that comes along with it) to the mix this year, the stress of the holidays has slightly surpassed the cheer. As a control freak when it comes to money, financial stress is a big part of the equation.
Am I staying on top of the bills or with my mind hazy without sleep did I miss one? Will I end up paying a late fee? Now that I have my own house, how much decorating is good enough? With all the friends and family visiting to spend time with the baby, will I do a good enough job entertaining and be a good host? How much should I spend to make them comfortable? Should I furnish all the guest bedrooms in one go? Do we have enough money to handle all the bills come January? It goes on and on. The more I get worked up, the more my mind just shuts down and the stress level goes through the roof!
I can’t let this happen. I won’t let this happen. I have worried about money before. A lot. But I was living paycheck to paycheck then. I have worked really hard to get out of that situation so all these worries are bothering me even more.
What can I do to let go of the financial stress?
After I broke down and cried for a while, I decided it is time I did something to let go of my stress. I have a beautiful baby to enjoy and this is not the time to worry about something that might not even be an issue. It is hard. I know it is not as simple as it sounds, but I am going to let it go. Here is what I decided to do to eliminate unnecessary stress:
Take a deep breath. I tried to prepare as best as I could ahead of time. We are no longer living paycheck to paycheck. And if the relatives are not happy with whatever I can do, it is not my problem. I tried and that is all I can do.
Do not tackle the mail as it comes. Sort the mail as it comes, set the bills aside and only open the mail that needs immediate attention. The rest can wait until later to be handled.
Slay the temptation to shop the stress away. As someone who has done a lot of emotional shopping in the past, I know this is something I have to continually watch. Shopping will give me a very temporary “high” feeling, but it will certainly add to my stress level as soon as I leave the mall thinking about where in the budget I will find the money to pay for it.
Set aside a certain time of the week to tackle all the financial issues. I do not have to check my credit card or review our budget every single day. I should set aside a couple of hours every week to review all the bills, pay them and review the spending. If I do it as they come, I forget what has been paid already and how much is left over in the account. It adds to the confusion and my stress.
Delegate the tasks to someone else. So far I have always handled all the finances myself. My husband has offered to help but because I enjoy doing it and he doesn’t, I have never taken him up on his offer. Now, I will. I know I will also feel an urge to double-check if everything has been done correctly, and that is something I need to keep in check.
Let go of perfection. I do not have to have the perfect holiday meal cooked for everyone or have a house decorated like it came out of a catalog. There is limited time and I should adjust my expectation to a realistic level.
Question my worries. This is something my husband taught me to do. Whenever I feel down, I should ask “why.” Why do I worry about this? Is there a basis for my worry? What is the worst that could happen if I miss one bill or pay a late fee? Will that break our budget? Will worrying about it do something to better the situation? If not, what is the point in getting stressed?
Do something nice for myself. Meditate. Vent. Spend some alone time. Cook a nice meal. Sleep. Take some time to volunteer. Enjoy a cup of hot chocolate by the fire.
There is worrying and there is preparing. I should prepare the best I can, which I believe I have, and let go of the things that are not in my control instead of worrying about it.
This is a wonderful time of the year. I should try to concentrate on the fun part — see my daughter grow every day, spend time with my family, enjoy putting up the decorations together, and savor the great little moments in my life, not the worries inside my brain.
This article comes from Anthony Fontana from the Quicken Loans Zing! blog.
For some of us, the end of 2013 just signals the beginning of 2014. Not a whole lot changes aside from writing 2014 at the end of a date. However, the end of this year is different. Why, you ask? Because FHA loan limits are set to expire. Beginning in 2014, loan limits will readjust to Fannie Mae and Freddie Mac conforming limits.
Throughout most of the country, Fannie Mae and Freddie Mac conforming loan limits are $417,000, while expensive housing markets such as California and Hawaii increase to $625,000. What does this mean for you? Mortgage applicants who no longer qualify under the revised limits will be forced to shop for a jumbo loan. In many cases, this could present a challenge due to tougher credit score and financial reserve requirements. Also, larger down payments are also a part of the process.
In some cases, clients may have to settle for an adjustable-rate mortgage instead of a fixed-rate mortgage. In others, it may be necessary to get a higher-rate second mortgage to be able to afford the down payment. Edward DeMarco, acting director of the agency that oversees Fannie and Freddie in conservatorship, recently spoke at a meeting in Washington. He stated that there are serious considerations on reducing loan maximums to lessen the federal government involvement in the mortgage market.
While DeMarco didn’t offer any specifics, industry analysts believe the maximum Fannie-Freddie loan size could drop from the current $417,000 to $400,000 in most parts of the country, and from $625,000 to $600,000 in high-cost areas such as coastal California, metropolitan Washington, D.C., and New York City. These changes are in addition to the rules regarding qualified mortgages, also set to be in place in early 2014.
I can already hear the commotion. What this really comes down to is having a sense of urgency. The sooner you act, the better for you. For those of you in high-cost areas, it’s imperative for you to take action before the changes take effect. If you wait, a jumbo mortgage could be your only financing option.
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Unless you live under a rock, you probably heard that Twitter just had its IPO. In English, that means you can now, for the first time, buy its stock on a stock exchange. Mere mortals (those without the insider connections to get the stock at its $26 official listing price) had to buy at an opening price of $45. After the initial surge, the price has settled back into the low 40s, and many reputable pundits (here and here) have suggested that buying Twitter as an investment might be a mistake.
You know how they talk about dog years, meaning you have to multiply the actual years by seven to arrive at a “normal” equivalent? Well, just as dogs have a much shorter life than humans, technology companies have a much faster life cycle and shorter lives than “regular” companies. For example, Caterpillar and General Electric have been around for eons, but does anybody still remember Digital Equipment, the tech darling of the stock market not too many years ago? Hotter than Twitter, it was. And who remembers Data General, its close competitor? Distant memories, both.
And what about Palm? Just yesterday it was the hot thing. Today its carcass, along with DEC’s, lies rotting somewhere in the Hewlett-Packard bone yard, which seems to have become the ultimate destination of tech companies when they reach the end of their lives. (Hmmm… where will HP go when its day comes? One can only wonder.) IBM, the granddaddy of all technology companies, has only survived by having more transformations and cosmetic surgery than Joan Rivers. Technology companies just face much shorter life cycles than, say, construction equipment manufacturers because the business they’re in changes at a pace never seen before.
Why does this matter? Twitter is a tech stock, and therefore likely to face a rapid move through the different phases of its business cycle… and it’s starting its publicly listed life as a money-loser. Why? Because it gives away its main product/service for free. Microsoft, on the other hand, has always charged a lot for what it sells, and it gives away nothing, except Hotmail. Therefore it has always been highly profitable. Add to that its high growth and it is easy to understand why it was a popular stock to invest in once upon a time. Apple went from the outhouse to the penthouse only when it made fantastic profits on all of its iThingies.
Earnings, the fancy word for profits, then, is the key to long-term success. But Twitter isn’t making any. Its fans would add “yet.” But this is where the “dog years” thing comes in: How long will it take Twitter to become profitable? And will it be profitable for any length of time before going to tech-stock heaven?
Until profits materialize on a consistent basis, the only reason people are attracted to a stock like Twitter is, well, stories. Stories are wonderful things and I love them myself, mainly because when I’m telling one, I get to write the script to make it say whatever I want. It’s the same with a stock story: I can spin a convincing yarn about how this hot company called Twitter will conquer the earth and achieve riches and fame to dwarf Microsoft. I could just as easily weave a delightful plot that has the company crashing and burning like Enron. At this point in time, you’d be hard pressed to choose between the two stories, because both can be very convincing. But there are still too many unknowns to know which one will play out in real life.
Warren Buffett famously stays away from stocks whose stories he doesn’t understand. And when he means stories, he means the reasons why this or that company will continue to make outsize profits. His examples are companies like American Express and See’s Candies, companies that brazenly charge more than their competitors do, have done so for decades, and look poised to continue getting away with that for eons to come. Twitter and Facebook, which don’t charge for their basic product, those are things he doesn’t understand. And, to be quite honest, most people looking at Twitter don’t understand where their profits will come from either.
Why, then, do so many people froth at the mouth to get their hands on a stock that is clearly overpriced by many magnitudes? The answer is found in something called the Prisoner’s Dilemma, something related to game theory. In a nutshell, it says you try to guess what others will do and figure out how you can profit from that. If you think other people will want Twitter stock, then you buy it in hopes of profiting from the surge. It doesn’t matter why the other people will buy; it only matters that they will. If enough people think like you, you collectively create a rising market. The same principle pretty much drives the gold price: You buy gold if you think others will also buy and drive up the price.
You can see how the outcome for this pricing model depends on how many people take the view that others will also buy. If enough people think that way, you get a nice little bubble going. If they don’t, the price drops instead of rising.
When Facebook went public, its stock lost 20 percent of its value in the first two days of trading. In its first two days of trading, Twitter lost 10 percent after a nice initial spike. This despite an intense effort to avoid the pitfalls stepped into by Facebook last year.
Not all IPOs depend exclusively on PD pricing (Prisoner’s Dilemma). Noodles & Company, the Denver-based restaurant chain, went public earlier this year, but their shares more than doubled after two days of trading and are still there after more than three months. Main reason: The company is profitable and has a proven business model for generating profits. That means the story of its future potential is easier to believe by more people.
Of course, it is way too early to judge whether the Twitter IPO is a success or not. However, until the company generates consistent and sustainable profits, its life cycle may be shorter than hopeful investors foresee.
I’m not buying. Are you?
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