Mar 31, 2008

Prediction Abilities and Personal Budgeting

How accurate are people in predicting the things that will make them happy? How accurate are people in predicting their own future behavior? These kinds of questions underlay some of the most interesting research in contemporary cognitive psychology. In general, the findings indicate that people are much less accurate in predicting their futures than they think they are. Regarding personal finance, your ability to predict your own future behavior is an extremely important component of eventual financial success. Part of that ability might be learned but much of it is most probably a matter of innate temperament. Later posts will examine this more closely. In general, when we talk about the big picture, short range predictions - say, about the economy - tend to be more accurate than long range predictions. The billions of dollars spent in Iraq this month will continue to be spent next month. The hardships people suffer from the mortgage meltdowns this month will continue next month. The loss of middle-class jobs we suffered this month will continue next month. For your personal finances, the opposite might be true. Long range predictions might be more accurate than monthly predictions. This is something that must be considered as you do your taxes, review your finances and make plans for your future. Predicting long-range financial conditions for yourself might be more accurate than short range predictions as you do your budget! The key to effective budgeting is looking at the big picture over the long haul!

Self Control, Debt Control

Taking on debt can be an act of childish self-indulgence or an expression of maturity and responsibility. The problem, of course, is that you might not know which it is when you do it. It's said that Socrates, in the middle of a shopping trip, was once asked to comment about the prescription to Know Thyself. He responded, "Why bother? It's all good!" Later, in a fit of shame and despair, he recognized that his Spend Spend Spend brain centers had been in a frenzy when he said what he did. From that point on, he avoided the malls entirely and became a prototype of virtue. Today we still search for virtue and ponder the meaning and management of personal debt: Self Control, Debt Control Blogging Debt Away

Mar 30, 2008

Rebates: Heaven Or Hell?

For frugal people, rebates can be heaven or hell. They are heavenly when you save substantial amounts of money. I especially like them for computer hardware and software. There are lots of stories about building your own computer which warn you that you can get a high quality computer custom fitted to your taste by building one yourself, but you won't save much money. That warning is a bit misleading. It's always grounded on a building experience whcih involved buying all the components over a very short period of time -- sometimes a week or even a weekend. If you follow that procedure, you are not likely to get large discounts on your parts. By planning ahead, you can buy components slowly when they really go on sale. For example, if you know you're going to assemble an ultraquiet PC sometime in the next 12 months, it makes sense to watch the Fry ads and pick up an Antec case when it comes with a large rebate. The case will not go obsolete on you very quickly. Other components can be picked up later as you look for good deals while making sure the parts will be compatible with one another. Acquiring components this way might take a few weeks or even a few months, but the final computer can cost you as little as a third of the price for a comparable, fully assembled PC that comes loaded with crapware which takes two days to uninstall. Rebate hell opens its jaws when you have to fill out forms that are complicated and difficult to understand. Working in front of the opened jaws means you have to make sure you enclose proper originals or copies of receipts, UPC codes, your birth certificate, or whatever and then get all the stuff postmarked much sooner than you first thought necessary. Falling into the jaws means you do everything you were supposed to do and the company never sends you your check. That said, my rebating experience has been mostly positive. Fry's, Best Buy, CompUSA and a number of other merchants have been very good to me. By this I mean I always got my money. The offices -- Office Depot and OfficeMax -- were much more problematic for me and eventually I stopped buying rebated items from those merchants because of the hassles. So this brings me main subject of this post: The rebate angel might be Staples! This year I shopped at Staples for the first time and bought a copy of TurboTax. The program came bundled with other software that would be free after rebates. The rebate application was the simplest, quickest filing procedure I ever encountered. Just copy some numbers from your receipt and you don't have to mail anything in. They match your online application with their own information about the purchase, and bingo, you are done! Right now, I feel like Staples will be my store of choice anytime I'm looking for rebated items. I'm assuming I will get my check in the usual four to six weeks. If I don't, you darn well will hear about it!

Mar 29, 2008

Do Stocks Outperform Bonds?

Investor folk wisdom preaches that stocks outperform bonds. Therefore, choose stocks when you need growth. This chart shows results for an investor who put $10,000 into each of three Vanguard funds roughly ten years ago: Total Stock Market Index and the Total Bond Market Index, which reflect the US market, and Total International Stock Index. Investments would have grown as follows: Total International Stock Index $20,527 Total Bond Market Index $17,546 Total Stock Market Index $15,477 Few investment advisers would have counseled the investor to put all the money into the international fund, so they would, in effect, have steered the investor away from the most profitable investment. Most would have advised the investor to put everything into the domestic stock fund, which was the least profitable course of action. Others might have advised the investor to use asset allocation to dampen some of the volatility of the stock funds by splitting the investment between stock and bond funds. The point? Apply critical thinking to folk financial advice! Bonds can outperform stocks! Equally important, bonds can give some protection against market volatility. Look at the chart for 2003. An investor who needed money for an emergency would have been in bad shape if all the investment had been put into stocks. Conclusion: Stocks might outperform bonds, or they might not! It all depends on a lot of other factors which you need to consider as you plan your strategy.

Theatre of Investing

Click image to enlarge.

Charles Givens and the Theatre of Investing

This blog began around 1990 (Had Gore even invented the internet then?) when I saw personal finance guru Charles Givens being interviewed on a morning television show. Givens mesmerized the program hosts as he described strategies for managing money and accumulating wealth. When his alloted time was over, the hosts were visibly reluctant to let Givens go. If memory serves me right, Bryant Gumbel was one host. In my mind's eye, I still see him delightedly conversing with Givens and making a mental checklist of things he needed to do in his own financial life after the show was over. Even after Givens left, the hosts continued to talk enthusiastically about what they had learned. Given their intelligence and celebrity status, it was startling to see how little these wealthy persons knew about handling their money. If it was good enough for the talk show hosts, it was good enough for me. Givens was on the air to promote his books and his lecture tours and the company he had founded to dish out financial advice and services. I immediately went to the library and checked out Wealth Without Risk, a Givens bestseller. The book taught me a lot about managing personal finances. In fact, I was so happy about what I was learning that I attended a free one-day seminar offered by the Givens company. There I learned even more about cleaning up my disorganized personal finances and investing to take care of my kids, so I bought a box of educational videotapes (Are you surprised they were hawking merchandise?) that I would use myself and share with loved ones. The materials were actually very informative and I still, in moments of pique, ruminate about which of my beloveds still has those tapes floating unlocatably in a basement or attic when I might want to watch them again some day. As often happens in enterprises dealing with finance, the Givens companies ended ingloriously, caught up in allegations of scamming customer money and lawsuits and other ugly things. I'd like to know more about Givens himself. Was he ever accused of any criminal behavior? Did he manage to hold onto his own wealth? What's his story? If he had lived longer, maybe he would've been able to clear his reputation. Or maybe he would've been able to establish himself as a first rate scammer if this is what he was. Who knows? At any rate, I learned enough about investment techniques from Givens to make a little money in the stock market. Some of it was lost, so I had to learn how to try and make it back. But learning about investment techniques is not the major lesson which needs to be mastered in regard to successful personal finance. The important lesson is that protecting your family's wealth and security requires vigilance, critical thinking and a good eye for the best and the worst of people. If you follow the advice of gurus who promise you you can make yourself wealthy just by performing a few tricks or following the folk wisdom of the financial industry, you will eventually scam yourself. Now you see the subject of our blog: What are the ways in which middle class people scam themselves into undermining their own financial security? If our readers desire it, we might even turn the blog into a wiki. Scamming and showmanship are natural partners. There was a lot of showmanship in the television interview where I first encountered Givens and a lot of showmanship in the seminar I attended later and a lot of showmanship in the controversies and collapses of his various enterprises. Such showmanship inclines me to invoke a theater metaphor for understanding how to deal with personal financial security and the villains that threaten to undermine it. We'll do more with this metaphor later. Finally, on several occasions I heard Givens advise people not to take the accumulation of wealth too seriously. It's important, he repeatedly preached, but it's not all that important. You transform yourself into a fool when you let the accumulation of wealth impair your important relationships or undermine your spiritual integrity. That's really good advice. So, thank you, Charles, for the enlightenment you provided. And the entertainment!