The Market Has a Cold 'Tussin Can't Help!

I know many of you may have some jitters regarding the stock market. The government has decided to spend $850 billion to "fix" whatever is plaguing the markets. As I mentioned last week, there are a lot of things I don't like about it, but the government has decided to give it a whirl, and well, us regular folks are just going to have to sit back and watch what happens. In one year, the Dow has fallen nearly 5,000pts. Panic still continues to be prevalent in world market, and even rational investors tend to be nervous. But let me attempt to explain what you as an individual investor should be doing.

I can only speak to long-term investors at this point--those who have at least over 5 years or so until they can retire. You have to look at as if the stock market has a "cold." All these Fed Rate Cuts, nearly nationalizing companies, buying up bad debt, and propping up real estate prices are like cough suppressants--it will only prolong the process. in a common cold, the body "coughs" to try to expel that Nasty Green/Yellow Stuff from your body. A cough suppressant keeps you from coughing, and forces the body to expel it in other ways. The market has a cold and has to cough out all these bad things we've done over the past few years.

I STILL hear real estate commercials asking if you want to "Flip and Grow Rich." Some will never learn. We have a housing glut now--too many houses on the market--and prices have to fall to a reasonable point to adjust to market conditions. Yet, some still don't want to let the market "work this out of its system." Remember when computers used to go for $2000-3000 or more and this was seen as "reasonable"? Now you can find a computer with the processing speed, performance, and quality for a third of that price because the technology has become so abundant. Housing is no different. Don't get me wrong--I think housing is a great investment, but banks are getting very conservative now and not lending as freely as they used to. The era of NO MONEY DOWN!, CDOs, and Adjustable Rate Mortgages are (hopefully) on the way out.

Bottom line, if you cannot take these stick market dips, then you probably need to pull out, but you do so at your own peril. Me, I'm staying put. A good investment portfolio has you nearly 100% invsted in stock in your twenties, and probably shifting to more conservative investments (like bonds, annuities, and by 10% increments in your thirties and forties and then 15% increments in your 50s and 60s.) That way, if you are close to retirement, your investments will be less dependent on the whims of the market. My 401(k) investmetns at this point
are in 100% stocks right now. In my late thirties I'll probably go to 90-10 (stocks/bonds), then 80-20 in my forties, then 65-35 in 50s, and down to maybe 35-65 in my 60s and beyond. These short-term market jitters should not be bothering you if you have a long way to go.

Yes, I know that Wall Street has done some stupid and greedy things in the past few years and we all have to pay for it now. They are taking it on the chin right now, and should. Next week I'm thinking of covering Credit Default Swaps and how it adds even more stupidness to our current situation. I know such topics may be a bit dry, but once you know how we left our Store to be managed by irrational folks before, you'll be alert if it ever rises again.

What’s Up with Medicare?

2010 and 2019—these are 2 very important numbers in your head. The first represents the year where we will start paying out more money than we take in. Those of you who did those rates of change problems in Calculus know that it won’t take long for the money tank for such a system to empty—which brings us that second number—2019, where the Medicare system is expected to be bankrupt. What’s scary is that the current candidates left in the Presidential race aren’t speaking about it.

From the LA Times:

Sen. John McCain of Arizona, the presumed Republican presidential nominee, had little to say when the latest numbers were released projecting Medicare going into the red by 2019 and Social Security following in 2041. The Democratic contenders, Sens. Barack Obama of Illinois and Hillary Rodham Clinton of New York, also sidestepped the issue.

Most of the people who read this are not planning to lean to heavily on Medicare anyway, resorting instead to building a strong 401(k), work benefits plan, or IRA to provide them with the needed funds to handle medical expenses in their old age. At least I hope so. But your parents and grandparents most definitely will. And the Medicare program is in serious trouble, even more so after the Part D prescription plan was added in 2003.

Expect the candidates (except maybe for McCain) to adopt the populist solution:

Tax “The Rich.”

Social Security operating in the red? Tax the Rich.

How about that Universal Health Care? Roll back those tax cuts on The Rich.

How to keep Medicare solvent? You got it.

But no one talks about the outlays (the cost). Rolling back the rich folks’ tax cuts (which means any person, family or business making 200,000+) won’t cover all of this. Which brings us to two solutions: either admit that everyone will have to shoulder an increased tax burden, or admit that some of these programs will unfortunately have to go or benefits will have to be sliced.

Let’s be frank: if the operators of Medicare and Social Security were a private business, investors would be running scared from them. Now imagine if the US Government forced you to own shares in the business… Now I know that these entitlement programs have been around for awhile but they were never meant to fund your retirement—it was simply meant as a supplement to retirement income. At some point some tough decisions will have to be made. Taxes will need to be raised. On everyone. Benefits will need to be cut, especially for younger Americans who have the opportunity to own and fund 401(k) accounts…or IRAs…or start successful businesses—like we always have.

So keep your eye out for Medicare, Social Security, and the coming burden of Universal Health Care. One would hope we can have these things and not pay for them, but if we want them, we will have to pay one way or another.

Your Thoughts?

Good Advice, Bad Advice.

The Financial Markets took it on the chin this week. However, while everyone around you is in full panic, it's important to keep your head. Those of you in our year-long Stock Market game (it's still not to late to jump on in), probably have experienced first hand the perils of day-to-day monitoring and trading in such a volatile market. This CNN Finance article provides some sound insight on the importance of investing a few nuggets, especially for you who hold 401(k) portfolios:

Fluctuations in the market shouldn't get to the 401(k) investor. Keep in mind your time horizon - most of us are going to be invested in the market until we retire, often decades from now.

On average, stocks move higher - their long term average gain is 10.8 percent each year, according to Hugh Johnson of Johnson Illington Advisors.

Over those long time horizons, stocks will move up and down. It will be nearly impossible for you to call the highs and lows. If you sell now, you run the risk of missing gains and paying fees to re-invest in the market.

Here's an example of how damaging moving your money around can be:

If you sold your stocks at the market bottom in September of 1998 when the Dow was at 7539.07, you would have missed out on portfolio gains of 21.8 percent by the end of that year.

Amen to that. Main point here--trust the long-term returns of the market, and shun the emotion to sell off your investments, especially if you have established, blue chip companies or sound value stocks in your folder.


ON the flip side:

Sometimes, conventional wisdom and common sense coincide. The problem is, people often times cannot find this part of the Venn Diagram of Realistic Thinking. This young unfortunate soul, who actually works for a company that gives out investment advice (although he apparently was not hired on much merit) encourages shunning Personal Responsibility and instead bumming off of your friends, family, and Credit Card companies.

No really--I'm not kidding:
To wit:

What happens if your car breaks down and you need money to get it running again? What happens if you lose your job and need to support yourself? What happens if you get arrested and need to bail yourself out of jail?

If you get in trouble and need to bail yourself out, the last thing you want is to spend your own money. The best way to avoid that is to make sure you can't afford to fix whatever the problem is. Young people are better positioned to pass off the cost of emergencies than any other group...

Every financial hardship is an opportunity -- an opportunity for your parents to show you how much they love you. Nobody's going to label you a parasite if you ask for help when you're in trouble -- that's the beauty of it.

Yikes!

If you're wondering what Estate this sheltered young man came from, understand that he is a Harvard Grad. (Not the common-sense Harvard Grad, but the stodgy, trust-fund, stereotypical kind you see on TV.)

So what do you guys think? Am I misjudging here? Perhaps up is down, and bad advice is the new good advice (and vice-versa). I'm sticking with my guns, and hoping this guy is just trying to build an audience to give real advice. Let me know if I'm missing something.

Also, what more would you like to see from our site?

See you next week.

Young and Confused…or Maybe Not?

So I found this article via TheStreet.com, written by Cliff Mason an-up-and-coming 20 something who wrote about "reckless saving." I read with interest with the pull-in line that advised young people "not to save money." Continuing in disbelief, he continues the theme with the following gem:

Many of you thought I was being reckless and irresponsible when I advised young people not to save money. I couldn't disagree more strenuously. There's no percentage in being a paragon of self-restraint and spending discipline while you're in your early 20s.

I was stunned that this guy works for a major financial media agency. The only saving point I can pull out of this is "early" 20s (he's 22). I'm 26, and I think I'm starting right on time (I began funding my 401(k) at 25). Perhaps he says this because most people in their early 20s have little or no money to save. However, he kills any last remaining hope I have for his philosophy when he states the following later in the article:

If anything, you're taking a dangerous and unnecessary risk if you try to be disciplined about money in your 20s. The risk is that you might make it to 30 or 40 without ever having had a prolonged period of irresponsibility in your life. And it's not just your youth that's at stake, it's your future.

If you spend your 20s grinding away, trying to follow all the financial disciplines that we're told make you a responsible adult, you'll never get the recklessness out of your system.

So, this is what he's going with. The two main points I've pulled from his article (you can read it to see if I've misled) is that between 20 and 40 there two extremes—you either save/invest your money OR you can live the fantastic life, but definitely not both. It's an unfortunate false choice.

As with anything in life, balance is the key. You should work to save what you can as early as you can. If you start in your 20s, saving 8-10% of your income in a 401(k) is a great idea because you have time to outlive the risks and market fluctuations and still do well. Not to mention that many companies will add more money to your contribution (free money). Waiting until you're late 30s or 40s to get started just makes things much harder. Plus, we've covered the importance time has over the actual money invested, here—with the actual Excel math calculation.

That being said, I think Mr. Mason is smart—he probably wrote the article to get a rise out of some readers. (He got me). I also think he makes some good points about how kids can't be kids these days with over-scheduling and rigid discipline (but I thought our generation was lazy and undisciplined…) which I could agree. It's not all about money, but with the protective safety nets projected to get smaller (Social Security, rising costs of health insurance, decline of pensions, and rising taxes) the burden of providing for your future days are falling more on the individual.

But maybe I'm just being too much of a financial "stiff"...what do you readers think? Does this guy know what he's talking about?



By the way, regarding our stock market game. Two points to understand-- (1) It's not too late to join us. (2) This game is to help people have a long view of the stock market. If anything, the game should be even longer, but I figured that it would be hard to keep people's interest for a year. Also, I don't know who 2win or SS07 are. If those are you, send me an e-mail or Facebook message.

Total Investing, Chicago Style

Ever Heard of John Rogers?

Maybe you've heard of his company--Ariel Capital Management. I was reading an article posted on CNN and was quite intrigued with his "investment plan." Summed up in the article title "Buy. Hold. Profit. Give Back." Here are some of the highlights of the article:

Rogers typically holds a stock for four or five years, an eternity compared with the 14-month holding period of the average mutual fund...In the past decade his fund has earned nearly 14 percent a year, beating the market by more than five percentage points annually and outperforming three-quarters of all similar funds.

Ariel appears to refrain from loads or high fees, but if you have a 14-year record of beating the market by an average of five points is not too shabby at all! It just goes to show the superiority of patience and risk-taking by buying and holding the right stocks, without running up fees by having a high turnover (the flagship Ariel Fund has a turnover of 28%). To be fair however, compared to others in the business under the same investment strategy, he is par for the course in terms of performance--about average. But let's not stop there.

What really stands out is the "give back" portion of the investment strategy, on how he decides to empower inner-city students by teaching them the importance of investing.

Question: Why don't African Americans save and invest more?

Answer: I think it comes down to public education. The "three Rs" need to be the three Rs and an I: reading, writing, arithmetic and investing. Financial literacy is just as important in life as the other basics.

Question: How have you tackled that problem?

Answer: We wanted to start with very young kids. So we adopted a public school on Chicago's South Side and made investing part of the curriculum.

We give a $20,000 class gift to the first grade and manage it, with John Nuveen & Co., until they are in sixth grade. Then the kids take over and pick real stocks with this real money.

When they graduate in eighth grade, they give the original $20,000 back to the incoming first grade. They donate half of any investing profits to the school and divide up the rest.

With that money each student opens a 529 college savings account, to which we donate another $1,000. So they leave with something tangible. And the investment curriculum helps these kids with their math skills; the test scores are really high.

I think this is a great idea, and I hope to do something similar in the future--I may not be able to pull from millions to give back, but I definitely admire and will support results-oriented programs like the one above in any capacity that I can, financially or otherwise. I also encourage you readers to seek out and support similar programs in your area--whether it's through corporate responsibility programs like Ariel is doing in Chicago, or giving regularly (financially and by volunteering) to your place of worship or civic organization. Seeing this makes me hope they will pull out a similar program here in New York City. It also shows how investing in your community will help us all over the long term.

Well, there's a thunderstorm a-comin,' so I'll get off this computer. I will be traveling over the next two weeks, so if you don't see any articles from me directly, please don't hesitate to check out our Newsreader over to the right (which is updated every day). Those of you reading through Facebook will have to click through to our website.

See ya soon!

Join Our VSE Stock Market Game!

Join Our VSE Stock Market Game!

Dear readers of Wealth Weekly,

When it comes to stock market investing, we always encourage you to look at directly purchasing stocks only after getting your financial foundation in order. That means eliminating (bad) debt, establishing an emergency fund, fully funding your 401(k) and IRA (using index funds wherever possible) , and THEN look at investing in individual stocks. It's a guideline that will ensure the most success, so you can follow or ignore as you wish. Later this week I will be posting a conversation from a talk given to the NSBE Chapter at Columbia University, which I thoroughly enjoyed. So this week I will actually be posting 2 articles (well, only if you include this one).

So we wanted to get people's minds wrapped around the concept of what investing in the stock market entails, so that when the time comes, you will know what you're truly getting into. Unlike most games where you start with a large sum of money and manage it over a couple months, our game will run for 1 YEAR—this will show us just how readers, fellow bloggers, and others endure the ups and downs of the stock market for 1 year. You will be given $10,000 (fake money) and will invest it for over a year.

Click [here] to register for the game and join in.

When the page loads, look in the lower right-hand side of the screen for a box called "Create or Join a Game" and enter the Game ID: PF_Investors. If you haven't been registered, you should register (its free) and follow the instructions to join our game.

The game officially begins on April 1, 2007 and runs through April 1, 2008. I haven't discussed any prize information, but I may try to come up with something to spur participation as we move on. Take a moment to register at MarketWatch and join our game. I'll be sending reminders for the next week encouraging you to get involved.

Good luck!

--Charles J