As we approach the end of 2009, the collective hope of investors is pulling for further stabilization and recovery in the economy, and in our portfolios.  Though many economic indicators suggest the ‘Great Recession’ is over, without some luck even the experts can’t accurately predict if  better times will prevail in the space of one year, five years, or that we won’t yet experience some type of ‘double dip’ economic slump.  Whatever the road ahead, there are few excuses not  to be better prepared in our investment given the lessons learned from the historic market volatility of the last two years. 

Those teachings include the discovery of our individual risk tolerance, how to allocate investments accordingly, and the revelation of a stock market that can behave as if  it owes us nothing -  ruthlessly reclaiming years of portfolio gains in very short order.  But over longer time spans, and that means decades, the stock market has been a benevolent provider of positive investment returns.  As part of a balanced and diversified investment policy, these returns provide nourishment to the growth of an investor’s long-term savings.  This understanding, paired with an investment approach matched to our temperament in the presence of uncertainty, helps us stay the course and avoid knee-jerk reactions to see-saw market events.

Just as the financial crisis bestowed upon us these valuable lessons, equal care should be given not to impute new-found wisdom to rhetoric and backlash springing forth in the financial media.  For example, a barrage of negative press and opinion has been aimed at how Americans save for retirement through employer-sponsored  vehicles like 401(k), 403(b), and 457 plans.   Market events have made it  journalistically and politically fashionable to attack these plans as fatally flawed, and to espouse their apparent shortcomings in living up to the promise of providing plan participants with enough savings for their retirement years.  For example, the October 19, 2009 Time magazine article “Why It’s Time to Retire the 401(k)”, profiles several folks who were nearing or beginning retirement right when the financial storm of 2008 struck.  Their investments ran smack into the gale-force headwind of a severe bear market, taking a heavy toll on the ability of their savings to provide enough income, and shaving years off the expected longevity of their nest eggs.  Sadly for these retirees, most had to alter their retirement dreams by returning to work, spending less, or otherwise enjoying a lesser lifestyle than that for which they had worked and saved over careers of 30 to 40 years.

Interestingly, the Time magazine article chose not to examine how each of the would-be retirees’ investments were allocated. That is, the balance of stocks, bonds, and cash in  retirement account portfolios.  From the results cited, it is quite likely most of these folk were taking on too much risk as they neared retirement.  This means accounts were heavily weighted in stocks with too little committed to more stable fixed income securities like high quality bonds, and cash.  The article gave little regard to the importance of risk tolerance and the role of asset allocation in controlling risk over the span of one’s investment timeline, especially as retirement approaches.    On the contrary, the author preferred to heighten anxiety with statements such as,  ”…the [401(k)] accounts proved most dangerous for those closest to retirement”, and,  ”…the longer you hold a 401(k), the more market-exposed it becomes.”  These statements suggest a lack of diligence by the author to fully explore and determine the degree to which the profiled individuals’  results were connected to underlying investment risk.  More importantly, the article failed to deliver an invaluable message to readers:  asset allocation is the single most effective risk-management tool for investors, and how to apply it as a function of one’s investment horizon.  Instead, the article gave only light treatment of the long-term value created through asset allocation, and questioned if there is any mix of investments that is “100% safe from disaster.”   Anyone familiar with the concept of  risk and reward could counter that a 100% safe investment is not going to provide the long-term return needed to accumulate enough savings  to fund decades of  life in retirement.  And doesn’t running out of money in retirement fit this article’s definition of disaster?

From a political perspective, the Time article goes on to promote replacement of the 401(k) with a government guaranteed or privately insured retirement fund – essentially a deferred fixed annuity arrangement.    How different this idea is from our system of payroll taxes and retirement benefits under  Social Security system is not easily distinguishable.   And since we’ve made no progress addressing the long-term solvency of Social Security,  it would be irresponsible not to fix it before more taxpayer money is spent administering, insuring, and guaranteeing benefits under a new program.  Furthermore,  it would be a mistake to disallow retirement savers access to  the capital markets.  Yes, there is risk, but over a 30 to 40 year window of employment and saving, that risk  can be managed successfully and ultimately rewarded.  That reward will come in the form of higher returns than we could hope for from any kind of government or otherwise guaranteed program that promises “100% safety.”

Simply put, and for reasons  intentional or not, this article was inspired by the unfortunate outcome of investors nearing retirement, who happened to be 401(k) participants.  But the same stories can be told of investors saving for other goals who had too much committed to the stock market at just the wrong moment (say, as Junior’s tuition bill came due).  Or, of other retirement savers  like U.S. government employees  with overly aggressive allocations in their Thrift Savings Plans (which are very similar to 401(k) accounts).  Even  famous institutional  pension funds grabbed headlines with their surprising losses in 2008.   There was plenty of pain to go around for stock market investors, not just 401(k) plan participants.

For the risk we assume investing in the stock market through a 401(k), or any account type for that matter, we should only expect to be rewarded if that risk is managed intelligently.  So, for relating these unfortunate  outcomes, we owe the Time magazine article a debt of gratitude for tacitly making the same point.  A further conclusion can be drawn from the experiences of  the retirement savers profiled in the article, and all investor who were caught off guard by the market meltdown.  That is, the larger issue is not at all whether a 401(k) or similar retirement plan is good or bad.  Rather, it is a matter of investor education:  understanding investment risk, one’s attitude toward it, and how to save and invest consistent with that view over all stages of life.  Many improvements have been made, and more appear forthcoming, that help retirement plan sponsors educate participants with investment selection and controlling risk.  However, the events of the last two years show that we still have a long way to go.

When making investment decisions, retirement savers should avoid serious consideration of  media sensationalism born from the financial crisis  Daily events and ever-present emotional commentary from pundits should not guide one’s plans, or give cause for self-doubt and inaction.  Instead,  investors should press forward with their plans to steadily build wealth over time, in both good and bad markets.  Savers farther away from their goal, such as retirement,  actually benefit from market downturns as their invested dollars buy more equity at lower prices.  And as we’ve painfully learned, for those nearing or in retirement, stability of their nest egg becomes more important as there is less time for their portfolio to recover from a downturn.  If you are uneasy with the stability or performance of your investments, and the progress you are making toward your savings goal, perhaps it’s time to empower yourself  through education.   Though it is critically important to your financial future, understanding and managing investment risk  is far from rocket science; most people are quite capable of teaching themselves the basics.  There are many books that cover investing and asset allocation listed on the  Resources page of my website at http://www.GoverFinancialPlanning.com.  If you prefer personal professional advice, a fee-only financial planner can provide unbiased and objective recommendations.  A great place to start searching for a planner in your area is the Garrett Planning Network website, at www.GarrettPlanningNetwork.com.

Finally, I would like to offer one more suggestion to keep in mind when interpreting the noise and spin we get from the financial media.  That is, avoid putting too much faith in numbers.  Some articles are so laden with statistics that it becomes mind numbing, and much of it is either intentionally scary or overly optimistic, included to bolster the storyline bias or provide shock value.  Taking quoted facts and figures as absolute and fixed in time, especially market statistics, ignores the dynamic nature of the markets themselves.   For example, the Time article tells us that the average 401(k) account balance at Fidelity dropped 31% from the end of 2007 to March 2009, as the stock market bottomed out.  This is indeed sobering, and worth knowing.  But later in 2009 Vanguard reported that the median balance of their 401(k) account holders had actually  increased 7% over the past two years. 

The message here is that these two data points must be sewn together in order to fashion meaningful information .  One fact conveys the difficult experience of investors through March 2009.  The other tells how those who stayed the course were rewarded as the market rebounded.  The Time article would lead us believe that all investors who retired at the height of the storm suffered nearly irreparable damage to their 401(k) balances.   But this can’t be the case, since even the median investor who lost 31% at the bottom was significantly (but not totally) rewarded by sticking to a plan and avoiding the panic to sell at the darkest hour.  Furthermore, the median 401(k) account is probably much more aggressively invested than the accounts of those nearing retirement should be – a portfolio sensibly allocated for the pre-retirement years would have suffered much less of a decline during the crisis.

For those interested in reading the full Time article, please follow this link: http://bit.ly/1lcVFg

I would love to hear your comments!

Warm Regards,

Gary

This was the first course that I taught using someone else’s shell. During the summer term many of my students commented that they didn’t feel that the course was neither representative nor practical in helping them outside the textbook. The issue that arose when the students made these comments was that I agreed 100%. There were no applications for my students to apply the knowledge they had just learned. Exactly what was I teaching them if it had zero use after the course?

I’ve been assigned the course again for spring. This go around is going to be different. The students are always going to understand what the concept they are learning is and how it pertains to their particular life. The integration of “real-world” applications are key to this course. We will learn together in a comfortable medium. We will also be engaged in Twitter in this course throughout the term. Feel free to follow our progress (small or large) with the hashtag #bus115otc.

To begin a cohesive design of this course, I have obtained another one of my trusted small ringed journals. Here is where I write down all the thoughts for the course and then begin designing week by week (though I don’t use weeks any more) and then enter everything into the computer. At the present time, in order for me to really know who the students are taking personal finance, I’m going to have to know about their finances. I am requiring a survey, but in order for students to participate it will be the first quiz. The information will be held strictly confidential and all students will understand that only I will know the outcome of the quiz. This quiz will shape the entire course each term. It will determine how many of the students are supporting themselves versus their parents. This is a vital piece of information in the course. The textbook problems that were originally chosen could not be answers by two-thirds of my students in the summer because their parents supported them while they were full-time students. These are major concerns that I had and wish not to have again.

Now it is on to the “real-world” application of personal finances in relation to each chapter. Let the fun begin

Driving a car is a very expensive undertaking. You must pay for the car you drive (ie. own, lease, rent), you need to insure that car and yourself as the driver, you must fuel the car, you must maintain the car and fix any problems, etc… the list goes on and on. Even with a monthly car payment of under $400/month, your total operating cost of the vehicle are probably close to double that. That is why it is important to use your car in the most efficient way possible. This post will discuss several easy ways to do that.

1. Drive a fuel-efficient vehicle:

In most countries outside the US, small cars are the norm - there are very few SUV types.  Although it has been popular in the US to drive a large vehicle, it is unnecessary for most people and it is clear that the trend is now toward more efficient vehicles.  I recommend driving a car that gets no less than 25 mpg in mixed driving conditions. By switching from an SUV getting 15 mpg, you may save over 300 gallons of gas a year. With the national average per gallon of regular gasoline currently hovering around $2.65 you can expect to save $795/yr. by switching from a gas guzzler to a sipper (300 gal. x 2.65/gal.=$795).

2. Shop your car insurance

I recently shopped my car insurance and was shocked by the results. Insurance companies rate your driving history differently. Some count moving violations and/or accidents from the past 7 yrs toward your quote while others only look back as few as 3 yrs. Just because you got the best deal with your current insurer last year does not mean that you shouldn’t shop your quote this year. I obtained quotes from four insurers, including the company I was already with. I found a major difference in the quotes for the same coverage. I ended up switching insurers and saved $600/yr. for the same coverage.

*Hint: Take a defensive driving course. It will cost you about $50 but you will save 10% on your insurance for each of the next three years. With a $1,200 policy, you will save $360 over that 3-year period or $120/yr.

3. Do not change your motor oil every 3,000 miles.

Read your owner’s manual. Most car companies recommend driving 5,000 – 7,500 miles between oil changes. Although your mechanic will recommend changing it every three months, this is just a way for them to make money and is not benefiting you or your car. If you drive 12,000 miles/yr. this could save you $72/yr. based on a $30 oil change.

4. Practice proper driving habits

We all fall victim to impatient driving from time to time but it can be costly. Try practicing these driving habits to keep your gas mileage up and your costs down:

• Drive at a moderate speed and do not accelerate or brake to abruptly
• Kepp your tires properly inflated; don’t forget to replace, rotate and rebalance tires
• Minimize driving with a cold engine (warm up your car for 30 seconds when driving in the cold)
• Avoid idling for long periods
• Ask your mechanic to top off all fluids at every oil change (this should be included in the price).
• Give your car a bath - have it waxed once a year

*Hint: Use regular fuel unless your car’s manual tells you otherwise. Premium fuel only helps with performance and is not necessarily better for your engine. Most cars will run perfectly fine on regular fuel and by doing so you can save $100/yr.

In review: For most of us, driving is a necessity and it one of the largest expenses in your budget. It only makes sense to handle your driving expenses in the most efficient way possible. Follow these rules and you can save $1,700/yr., I did!

-PFG 

2007 – 46 page Evercare and National Alliance for Caregiving report entitled, “Family Caregivers – What They Spend?  What They Sacrifice: The Personal Financial Toll of Caring for a Loved One.”

2009 – 43 page Urban Institute report entitled, “What the 2008 Stock Market Crash Means for Retirement Security.”

2009 – 41 page Urban Institute report entitled, “Do Health Problems Reduce Consumption in Older Ages?”  Included is data on prevalence of health concerns among seniors, and percent of income seniors spend on healthcare.

Just wanted to wish everyone a very merry Christmas — I am visiting family on vacation for a little more than a week now. For the next two days, I’ll be fairly radio silent but will come back with more posts starting on Saturday.

With the end of the year and a new job approaching, there are particular personal finance items I will have to take care of, and blog about.

Until then — eat, drink, and be merry!

More than one in five UK parents are borrowing from their children’s savings account, according to Engage Mutual Assurance research. Nearly half (44%) take between £200 and £500 gradually over a period averaging up to five months before Christmas.

In a recession economy, it’s surely not unreasonable that Junior pays his or her way in order to make sure mummy/daddy (delete as applicable) can afford to keep a roof over their heads, food in their mouths and the heating on. It’s a superb lesson in growing up, learning collaborative responsibility and experiencing social cohesion!

However, up to 13.3 million people plan a late hit on the shops today, according to new data from Sainsbury’s Credit Cards. One in five (again!!!) adults will spend around £1.37 billion on last-minute Christmas shopping.

Get this – the equivalent of £57 million an hour or £951,000 per minute will be spent purely on festive frippery on this one day alone!

The research says that around 18% of this last-minute spending – some £246 million – will be placed on credit cards.

Wonder where the rest is coming from …

I admit it, I am a bad blogger. I’ve fallen off the blogging wagon and I am desperately trying to grab back on.

I have had quite the busy last month, and it’s been emotionally draining.

On a personal finance note, my LOC is down to $2999.99 (haha), my Visa has a balance of $100-something, and I am retiring the Visa to be my emergency card. I applied for a new Mastercard with a different bank than I’ve always used, and got approved. It’s a paypass that gives me airmiles, so that is going to be my main card now. I unfortunately have to work Tues, Weds and Thurs of next week.. although I suppose it’s not that bad as I can use the money. But I have tomorrow off, which is nice. Five day weekend!

On the boyfriend note, T went for his medical and also received his police certificate. So he has all the paperwork, except for some photocopies he needs to make. We need proof of our relationship and living together, so he has to photocopy things like our rental agreement, copies of our joint bank account statements, and whatever else has both of our names on it. I’m also going to print out some of our emails, pictures of us, and make copies of cards he sent as well as boarding passes. Hopefully we can send off the application in January and get him approved by April!? ;D

Other than that, I’m quite looking forward to Christmas. I spent a bit more than I wanted to, but oh well. I’m planning to buy myself suitable boots in January (hopefully there will be a sale, I have my eye on a pair), and I have to pay for my hotel room for the Pulse still.. but other than that, I’ll be on a No Spend in January to get the LOC under $1500.

I’m mentally working on my New Year’s resolutions. There’s a LOT that I want to change, that I need to be proactive about. But ugh, I feel like I’m ALWAYS saying that. I just need to grab the reins and go.