Investors are Panicking. Great Time to Invest!

Unless you’ve had your head in the sand, and many have, you cannot turn on the news without hearing how the stock market has tanked. I’ve been asked by friends and family alike about if its time to “get out” of the market yet, and the answer is unequivocally NO. (Yes, I still use SAT words!)

But let’s look at it another way—when is the best time to buy electronics, clothing, and food items—when it is on sale, or when it isn’t? If you’re not a millionaire and have people purchase these things for you, the answer would be the former and not the latter. Very few people would advocate waiting for prices to go up before going out to make purchases.

So why not look at the stock market the same way? Prices are being dragged down because of the falling dollar, housing market and credit market crashes, and many stocks are being pulled down in the process. Mortgage-backed securities, which we featured [here] before the decline of the housing market, have driven down the market. Lesson learned, yet we move on.

It’s important to make sure you don’t tailor your investments to one particular sector. This has become evident after the dot-com bubble and now the housing bubble. That doesn’t mean you should avoid housing stocks, but you should make smart choices about including the right ones in your portfolio. And if you don’t know enough about making such a choice (I will freely admit that I don’t), its best to focus on the long-term and invest in mutual funds—especially index funds, which are readily diversified. You may also want to consider Growth-focused funds and some international funds. Check sites like Morningstar for more information.

So now is not the time to bail. There’s a stock sale going on and people are bailing out at the wrong time. If you’re in it for the long haul, consider this as buying your investment for a much cheaper price—and rest assured, these prices won’t be here for long! So act today! But wait, there’s more!

Well, no there isn’t. I got a little carried away. See you next week.

Spending More Makes You Feel Good?

So I saw this on CNN recently:

Researchers in California have uncovered that Americans are more satisfied by a wine's taste if they "know" it's more expensive. Antonio Rangel, associate professor of economics at the California Institute of Technology, has analyzed the reactions of 21 volunteers who were presented 15 wines in a random manner, the only information being the price.

Unbeknownst to them, two of the wines were repeated, but presented with different price tags. The researchers also carefully observed changes in a part of the brain known as the medial orbitofrontal cortex, which plays a central role in many types of pleasure.

They found out that test subjects were more pleased by the taste of wines they thought were expensive.

Well, there you go. Although the sample size in this study was small, I still think it is an important study. This is not dissimilar to the not-as-scientific study performed by the libertarian comedians Penn and Teller, who tried to see how patrons reacted in an upscale, high-end restaurant when they were served very cheaply-prepared food. See the clip in my September article here. But wait! There’s more:

As part of the test, a pricey $90 wine was provided marked with its real price and again marked $10, while another wine was presented at its real price of $5 and also marked with a $45 price tag. In both cases, the volunteers thought that the wine was better when the higher price tag was presented.

This should be no secret to most people; however, most consumers still fall prey to it because they are convinced that more expensive products are “better” and “cheaper” is somehow less in quality. For consumer goods, not just wine, this is just false. But why do people behave this way? From the study:

The results showed that the way in which the brain works is that it mixes pleasure with expectation as to how good the wine should be. Since the expensive wine was supposed to be better, their brains perceived it as the superior drink.

This means that no matter how good a cheap wine may taste, consumers will still likely buy the more expensive wine and believe it tates better.

Again, not all that surprising. But it’s usually the “well duh” stuff that trips up the average consumer in restaurants, in the electronics store, the grocery aisle, and even the car salesman’s lot. I’ve had countless people try to justify why one particular shoe “wears better,” how no mp3 player’s sound quality can rival the iPod, or the name brand grape soda taste better than the store brand. To be fair, sometimes these conclusions are true, usually though its hard to objectively prove. Marketing departments at major companies know this, and it usually works in their favor. People buy more expensive goods with the expectation (feeling) that it should be better, and their brain’s logic center loses out and confirms this “feeling.”

There are times though, when it doesn’t work. Witness the sales race between the PlayStation 3, Microsoft’s Xbox 360, and Nintendo’s Wii. On paper, the PS3 looks as if it should be “better” by a long run, and it is of course more expensive. The same occurs for the Xbox 360. The consumer market however, bucked the trend and opted for the cheaper Wii, and demand continues to outpace supply for the device.

But let this be a warning that you should always consider—never underestimate the power of marketing, and don’t ever think that paying more for something makes it better. Moving forward, you should be aware (and more careful) of your spending decisions.

Two Quick Money Tips for 2008

Hi Readers. Happy New Year! Sorry for the slackness between posts, but I’ve been a little involved in Presidential campaign activities. I know, no excuse. Now that you have set your resolutions and (hopefully) not failed yet, consider some of the money tips collected from writers around the Web for the new year.

Consolidate some of your banking accounts. This is the most effective way to ensure that all of your money is properly going to the right spots. You should probably try to consolidate your money to one or two main accounts. Because of the ease of checking and direct deposit, I have a brick-and-mortar bank and then I have my emergency/long-term savings with ING direct. You may like other options.

Automate your Savings Plan. Saving is awfully hard to do, especially if you consciously have to move money over every month. By setting up an automatic transfer plan that is connected to your main checking account or a part of your direct deposit, it gets much easier because the savings is out-of-sight and therefore out-of-mind. If you choose a high-yield savings account like ING Direct or HSBC direct you should be in good shape.

We’ll post more as we move along this year. Make 2008 the year you finally take active control of your finances.