PassionSaving.com Home Page : : April 2007
April 2, 2007 16:30 – Spending Time
There was a time when I was looking for ways to reduce spending and I elected to eliminate the cost of cable for a few months as an experiment. I soon found myself enjoying all the free time that I had previously complained didn’t exist in my life. I got to bed earlier and was able to take long runs before heading to work. I had time on the weekends for long walks and bike rides with my wife. My freelance writing career was transformed from something I dreamed about to something I pursued in the real world. Eight years have passed and I’ve never given thought to going back to paying for cable.
Television takes away our time and our time has value. My wife and I do permit our two boys to watch videos, and I sometimes order DVDs of old television shows that I watch with them. So they know what television is. But they spend a lot more time building with Legos than they do watching videos. We limit their video-watching to three days of the week.
Television can be fine in small doses. It’s costly both in terms of time and money (being exposed to commercials causes us to spend more on things we don’t need — otherwise, why would so much money be directed to being sure that we see them?) when it becomes an addiction. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 3, 2007 16:10 – Truly Sick
People with high fevers or other truly incapacitating illnesses should not be at work. It’s hard for me to imagine a responsible argument otherwise.
The reality, though, is that those sorts of illnesses are relatively rare. Most sicknesses slow us down but do not incapacitate us. Those sorts of illnesses sometimes pass more quickly when we ignore them and go about our usual business than they do when we baby ourselves.
Did you ever fake a sickness when you were young to get out of school? I did a few times. I can remember when trying to act sick actually starting to feel a little sick. All sicknesses have a mental element. Let the sick side of you know that you are weak, and the sick side grows more confident that it can take over. Some people refuse to be sick and rarely get sick.
It’s better to fight through a small sickness. It is of course irresponsible not to stay home in bed or to see a doctor when dealing with a serious illness. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 4, 2007 17:11 – Caution: Teenagers at Work
There is a strong value proposition in having teenagers work. Most teenagers are at the beginning of the learning curve when it comes to practical how-to-succeed-in-the-workplace skills. The payoff that comes from working up to 20 hours per week is large.
It’s important, though, that the hours that a teenager devotes to work be limited. Teens are excited to have their own money for the first time and of course enjoy the feeling of pride that comes from earning it from their own efforts. Work can easily come to be seen as being more appealing than homework, which provides a much bigger payoff but much farther down the line. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 5, 2007 16:26 – Pay for (School) Performance
I’m not a fan of the idea of rewarding your child with money for getting good grades. I’ll tell a story from my own life that illustrates one downside.
I was a straight “B” student. I cared about everything enough to do the work needed to get a “B” and I cared about nothing enough to do the work needed to get an “A.” My parents offered to pay me a small amount of money to get an “A” in any subject. When that didn’t work, they offered to buy me a new bike if I got an “A.”
In response to that offer, I erased one of the grades on my report card and wrote in an “A.” I got caught and was punished.
The reality was that my primary motivation was not to get the bike but to avoid letting my parents down again. Their offering of the bike told me that this was really important to them. Knowing that provided me enough motivation to come up with the idea of erasing the grade. It didn’t provide me with enough motivation to do the work needed to earn an A, however. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 6, 2007 16:05 – Rob’s Radio Interview on the Passion Saving Concept
I’ve added a link to the The Book I Wrote section of the site to a 15-minute interview (in five parts of three minutes each) that I did with Maxine Frost. The interview aired from October 7, 2001, through November 4, 2001, on the Sunday Morning Update program on Newsradio KEX in Portland, Oregon. It provides a good overview of the ideas explored in depth in the book.
To reference this entry please copy the url in this link: (Permalink)
April 9, 2007 14:22 – New Yorks Times Reports on Growing Disgust with The Little Stinkers
The New York Times has an article today entitled A Call for Manners in the World of Nasty Blogs. It reports on developments showing that the Normals are becoming increasingly repulsed by the tactics employed by The Little Stinkers, the sorts of abusive posters who have done such damage to the various Retire Early boards over the past five years.
The article contains a link to a blog post by Tim O’Reilly entitled Call for a Bloggers’ Code of Conduct. Here is the text of a comment that I put forward on that blog:
My name is Rob Bennett. I am the founder of the Financial Freedom Community, a group of discussion boards that explore strategies for early retirement and related topics. I pointed out at one of the boards (a Motley Fool board) that one of the individuals who posted in this community (he was the founder of the Motley Fool board) had gotten an important number wrong in a study published at his web site (he had failed to account for the factor of stock valuations). As a result, this individual has been stalking me for five years now and has destroyed numerous wonderful boards in the process.
It was not this individual alone who made this error. He was using a methodology that is used in many studies that are cited in articles telling aspiring retirees how much they need to save for retirement. Millions of retirements are likely to go bust in days to come if people are not informed of the problem. But this individual’s efforts have caused discussion of this topic to be blocked at every forum at which I have attempted to discuss it.
There have been hundreds of people who have asked that the discussions be permitted. Because the individual has his own web site, he has been able to form a Goon Squad that follows him from board to board for purposes of poisoning the discussions. I have been banned from most of these boards (I have never posted abusively). The abusive individual has never been banned.
We have an issue of the greatest possible importance at stake. We are dealing with a numerical calculation, so there is no question of reasonable differences of opinion here. I have contacted several well-recognized experts, who have confirmed my findings. But it is I who have been banned, along with reasoned discussion of the errors in the flawed studies. The boards we are talking about have rules in place prohibiting the tactics used to block these discussions (which are of great interest to most investors). Yet the site administrators (these include Motley Fool and Morningstar.com administrators) have failed to act.
In one case at Morningtar.com, there was a thread in which longtime participants at the board were asking why abusive posters were suddenly showing up on a daily basis. I put up a post explaining the background and noting as part of the history that this individual had directed death threats at me and my family members as one of his tactics. A Morningstar.com employee threatened to ban me for saying this! (Later, I was indeed banned at Morningstar.com.)
This is a free speech? Where the party who got a number wrong in a study can use any tactic imaginable to block discussion of the flaws of the methodology he used and those seeking reasoned discussion of important issues have zero recourse? This is not free speech.
Most normal people do not want to be associated in any way, shape, or form with this sort of behavior. It repulses them. A small number of posters intent on destruction can hold an entire community hostage if they are determined enough because most Normals do not want to get involved and because many site administrators are not willing to honor the promises they make to people who post at their boards to keep the discussions held at them reasonably clean.
This is a serious problem. I was heartened to see the New York Times article. The internet has great potential as a learning medium of the future. But it is only as strong as its weakest link. The weak link of discussion boards and of blogs is the abusive posters who make use of them with no constructive intent in mind.
Speech must be governed to be free. There should be a great freedom to discuss a wide variety of ideas. For that goal to be achieved, there must be limits on the poison that can be injected into a discussion as a means of intimidating the posters of the greatest intelligence and integrity into silence. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 10, 2007 16:04 – It’s Spending That Makes Us Rich
The popular view today is that everyone saves too little and spends too much. The reality is that many save too little and spend too little. Yes, it’s possible to do both. How? By spending on the wrong things. Spending on the wrong things brings saving down too low while not leaving money for spending on the right things.
There are many cases in which excessive cost-consciousness is a bad thing. How about when someone holds back from buying a book on how to purchase a home and as a result pays more in commissions that he would have had he been better informed as to how to negotiate? How about when a once-in-a-lifetime chance to enjoy a learning experience on a vacation to Greece is passed up because the money budgeted for touring was exhausted? How about when a promotion opportunity is squandered because the employee did not spend enough on clothes to present the image of success desired by those making the promotion decision?
It’s spending that makes us rich. I know of no one who became rich without spending. Effective money management is not rooted in a denial of the benefits of spending. It is rooted in an appreciation of how both spending and saving enhance the enjoyment of life in different ways and in a desire to obtain the greatest possible value from each dollar by seeking strong value propositions both from the dollars spent and from the dollars saved.
Buzz Update: The March 12, 2007, edition of the Just Do the Math program at the WorldTalkRadio.com site is devoted to a discussion of the article at the PassionSaving.com site entitled “Ten Reasons for Paying Off the Mortgage.” The purpose of the program is to promote a mortgage product. I have not examined the mortgage product, and am not able to comment on it. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 11, 2007 13:48 – The Non-Working Wounded
In the Retire Early Movement, you run into two basic types.
There is the hedonistic type. They want to get out of the workplace as soon as possible. They don’t want to have a house or kids, or, if they have kids, they want to be sure to “die broke.” They deny any desire to do useful work and make a contribution to the world.
My assessment is that early retirees of this type often end up angry at the world and miserable about their lives. They sometimes do indeed achieve financial freedom early in life because they possess the most important characteristic of those who attain this goal — a strong motivation to overcome paycheck dependence. Too often, though, they succeed at their pursuit of early retirement at the cost of pushing aside any desires they possessed in earlier days to live a life of meaning and purpose.
The other type seeks early financial freedom to live a life of greater meaning and purpose. This is the road that is seemingly harder to walk but that in the end appears to me to produce more satisfying results. The quest for meaning and purpose is part of our human nature and it cannot be ignored without consequence.
A Life Purpose need not be a grand thing. Someone might aim to retire early so that he has enough time to get back in shape again. Or so that she can read the great books before she dies. Or so that he can care for aging parents. Or so that she can see the world. Or so that he can learn to play guitar. Or so that she can get reacquainted with friends she lost touch with while working an inhumane schedule.
All of these are purposes that can bring more meaning to life than doing more of the old nine-to-five. It’s important, though, that you have some purpose in mind to which you intend to direct your life when you hand in your resignation from the corporate job. Otherwise, you may have ahead of you a form of madness worse than the madness of inane staff meetings.
More and more of our life experiences have been transformed into some sort of consumer transaction. There are now often fees charged to walk on the beach. People with lots of money worry about the costs of having children while in the old days people with little money didn’t give this question so much as a second thought. Even caring doctors feel a need to check their watches while talking to us so that they do not spend too much time explaining a diagnosis.
Capitalism brings us lots of good things. But it erodes our humanity. It is our job to protect it. We need to do that by making Life Plans that we follow as a means of balancing money considerations with the more important purpose-of-life questions.
There didn’t used to be such a need to think through this sort of thing. It was done for us by our churches or our families or our neighborhood cultures. If all else failed, Walter Cronkite would tell us the true story; Wikipedia just isn’t the same somehow. Today there is a compelling need for each individual to think though these questions and to develop a personal Life Plan that incorporates his or her thinking on both money and non-money issues.
We have opportunities to achieve higher levels of freedom. If we accept the responsibilities that come with those freedoms, it’s a positive development. If we fail to do so, we can turn what should be something good into something bad. Please don’t let the financial freedom advice offered at this site turn you into one of The Non-Working Wounded.
To offer comments on or ask questions about blog entries or any of the articles posted at this site, please click on the “Comments Posted” link (in blue) below. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 12, 2007 17:01 – Passion Coding
I’ve added an article to the “Planet Internet” section of the site entitled “Creating Passionate Users” Is a Money Blog in Disguise.
Juicy Excerpt: The big words and complicated buzz phrases make it hard to ask questions, though, don’t they? It’s not an accident. That’s the point! They could say what needs to be said in plain speech if they wanted to. They don’t want to. Obfuscation gives them an edge. It’s about keeping you in your place. That’s my take. Kathy Sierra has obviously experienced the same sort of thing in the programming field.
To reference this entry please copy the url in this link: (Permalink)
April 14, 2007 07:50 – Today the Greenhorn Valley View, Tomorrow the World!
Brian Weisz (owner of “The Great WeiszGuy” blog) has written an article for the Greenhorn Valley View advovating the Passion Saving approach to money management.
Juicy Quote: Once you had your magazines taken care of, you could move on to the next spending category. Before you realized what was happening, you’d have so many spending categories permanently funded that your need for current income would go down. Now think of the possibilities. Retire early! Do volunteer work! Do work that you’re passionate about, even though the current income isn’t as much as you formerly would have needed. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 16, 2007 11:53 – Protecting Yourself from a Circuit City Scenario
The Christian Science Monitor this morning ran an article entitled When a Layoff Is the Reward for Experience.
Here is the text of the section of the article that reports on my views:
” ‘The problem is that pay increases are given partly for merit and partly in response to pressures to satisfy employees who want to feel they are moving forward in their careers over time,’ says Rob Bennett, publisher of a personal-finance website, PassionSaving.com. ‘Employees who are just staying in place are given financial awards for doing so and then are found to be too costly to keep on when the company is faced with competitive pressures.’
“When times are good, Mr. Bennett adds, companies tolerate paying more for skills that are not increasing. But that changes as soon as competitive pressures come in.
“He suggests that employees ask themselves, ‘Am I really worth more money this year than last year?’ Start honing new skills. If you suspect a layoff might be coming, develop personal strategies. ‘You don’t want to wait until it hits and everyone is let go at the same time. Ask, What skills do I have? There’s much more flexibility today to take those skills somewhere.’ ”
The hard question is how the worker is to convey to the employer that his or her job is no longer challenging and that he or she is no longer growing in career skills. This is the sort of thing that should be discussed in annual evaluations. The reality is that it is generally viewed as “politically incorrect” to mention that one’s job is no longer much of a challenge. Workers keep quiet about this, managers are grateful that they do so, and the problem remains hushed-up until competitive pressures appear that cause the employee to lose his or her job. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 17, 2007 02:13 – The Retirement Risk Evaluator Is Here!
I’ve opened a new section of the site entitled “Risk Evaluator” to house the Retirement Risk Evaluator and articles relating to it. The first article posted to the new section is entitled Retirement Calculator Smashes Safe Withdrawal Rate Myths.
Juicy Excerpt: Today’s retiree can bring his safe withdrawal rate up to close to 4 percent by bringing his stock allocation down to 20 percent, according to the new retirement calculator. Alternatively, he can settle for a retirement that has only an 80 percent chance of success and take a 4 percent withdrawal from a portfolio with a stock allocation of 40 percent. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 18, 2007 17:20 – Change the World (of Investing)
I like most Beatles albums, especially Revolver.
Beaches are great, especially the one at Cape May.
I’m looking forward to seeing a baseball game or two this summer, probably at Camden Yards but perhaps at the minor league stadium in Frederick, Maryland, instead.
In many ways, life for me on Planet Earth in the year 2007 is good.
There’s one nasty piece of business that often manages to put me in a dark mood, however. It’s those pesky Old School safe-withdrawal-rate studies!
Yuck!
And double yuck!
What to do, what to do?
My view is that, when you see something in the world that desperately needs changing and you are in a position to do something to change it, you should get off your duff and give it a shot. So I have submitted a proposal to write a Manifesto for the ChangeThis.com site on the topic of “Investing for Humans.”
Juicy Quote: We need a new approach to investing analysis, an approach that focuses not on the characteristics of the investment classes, but on the realities that apply when humans make use of the investment classes…. A realistic investing model would prepare investors for what is to come. Realistic expectations are key to the success of a buy-and-hold strategy. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 19, 2007 17:34 – About Our Unique Retirement Planning Calculator
I’ve added an article to the “Risk Evaluator” section of the site entitled About Our Unique Retirement Planning Calculator.
Juicy Excerpt: The new retirement planning calculator offers the aspiring retirees using it the opportunity to examine many more strategic options than are examined in Old School studies and calculators. For example, most Old-School studies reveal the withdrawal rate that is safe for retirees willing to see the value of their portfolios reduced to zero over the course of a 30-year retirement. Many retirees have expressed a desire to examine more prudent options, such as crafting a retirement plan virtually sure to leave them with a portfolio balance of 30 percent or 50 percent or even 100 percent of the starting-date balance. The new retirement calculator permits retirees to examine what changes in the withdrawal rate are required to construct safe retirements leaving them with any of a number of end-point portfolio balances. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 20, 2007 16:55 – Using the Risk Evaluator to Develop Retirement Planning Strategies
I’ve added an article to the “Risk Evaluator” section of the site entitled Using the Risk Evaluator to Develop Retirement Planning Strategies.
Juicy Excerpt: The safe withdrawal rate drops from 5.18 to 4.83 with the change from a “Die Broke” plan to a plan to have at least 30 percent of the initial portfolio balance (in inflation-adjusted terms) remaining in the portfolio at the end of 30 years. I don’t think that’s such a terrible price to pay for the added security. My preference would be to go with the lower safe withdrawal rate and the added security of having some slack in my plan. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 23, 2007 14:33 – Withholding Error in Your Favor, Collect Big Check
The Northwest Indiana Times yesterday ran an article entitled Tax Refund Burning a Hole in Your Pocket? Here is the text of the section of the article that reports on my views:
” ‘Those eager to start trading stocks should pay off debt and read up on investing strategies,’ said Rob Bennett, the author of Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work, who considers the market currently lackluster for new investors. Though paying off old debts may not be as much fun in the short-term, it means ‘you will be positioned to earn solid, long-term returns and will not have the deadweight of interest payments on old loans holding you down’ in the future, Bennett said.”
Many people use overwithholding to save. In a technical sense, it is not a good idea because of the interest lost by having the government hold the money for a time. I think too much is made of this. The reality is that this is a saving approach that works. I think that the reason it works is that people get a good feeling from seeing the big check arrive. It is a way to save that provides a jolt of good feeling that you don’t need to wait 20 or 30 or 40 years to experience.
My view is that it is preferable to use a tax-refund check to pay off debt rather than to buy stocks when stock prices are where they are today. The exception is where your employer offers a match on a contribution to a Section 401(k) plan. The match is so good a deal that it does not make sense to pass it up.
Some argue that young people have time to recover from a big price drop. That’s so. But a loss in the value of your savings means that you incur reverse compounding; you lose not only the dollars directly lost, but the earnings you would have enjoyed on those dollars in years to come. Reverse compounding does more harm to young investors than to those who have fewer years before retirement in which the reverse compounding effect can work its negative magic.
To offer comments on or ask questions about blog entries or any of the articles posted at this site, please click on the “Comments Posted” link (in blue) below. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 24, 2007 10:40 – Are You Pro-Choice or Pro-Work?
My friends from the prison, they ask unto me:
“How good, how good it must feel to be free.”
And I answer them most mysteriously:
“Are birds free from the chains of the skyway?”–Dylan, “Ballad in Plain D”
A interesting parallel can be drawn between the growth in acceptance of the idea of using contraception that we have seen over the past 65 years and the growth in acceptance of the idea of early retirement that I expect is just ahead of us.At an earlier time in human history, people did not have choices about whether to work or not. Nor did they make choices about whether to have children or not. Life was about making the best of “choices” made by others (fate, or the gods, or the true God, or the community, or whatever). It is disorienting when the basics of life, things that have been true for thousands of years, are overturned or disputed.
This is part of the explanation of why some react so negatively to the idea of early retirement. We have gotten used to the idea that people can choose the type of work they do, although even that is a relatively new phenomenon. It is a radical shift, though, to suggest that whether to work at all is a matter that will be left to the individual to decide.
The history of decisions regarding children follows a similar path. At one time, there was little use of contraception and, generally, no decisions to make on this matter. Then, we had a period of time where most everyone had children, but decisions were made as to the timing of births and as to the number of children to have in a family. Now choice seems to encompass the decision of whether to have any children whatsoever.
The two changes have grown from similar roots. As man developed skill to manipulate nature, he developed contraceptives. He also developed technologies which made his labor more productive. The result is that he can work for fewer years of his life, if he so chooses. And he can have children or not, as he chooses.
I’ll leave aside the question of whether these changes are a good thing or not. My goal is only to point out one ramification of the vast increase in choice in these two most personal matters making up one’s life path. In both cases, the increase in choice makes it more difficult to keep discussions among those with differing opinions civil.
When there was no contraception, or when there was near universal agreement that families were a good thing, there was less of a problem with civility. Two people might disagree on the merits of a recent novel or of a vacation spot, but few of us take opinions about novels or vacation spots all that personally.
However, expressing opinions about whether to have children or not–or whether to work or not–goes to the heart of how we define ourselves as human beings. When someone makes an argument for a different choice on such a basic issue, it hurts.
It’s hard to maintain an academic posture on the issues of work or children. The expression of a different viewpoint on such matters seems to put into question whether we did the right thing or not ourselves on something that really matters.
Humans have come to a most difficult pass. Discussions of these issues are troubling. But not discussing them is worse. When people did not have choices to make over work or children, they could proceed blissfully through life without ever thinking about the pros and cons. To do so today is to follow the most dangerous course of all.
Today, if you don’t sit down and study the pros and cons of children, you are likely to just go with the flow of whatever river of received ideas you happen to be swimming in. You might end up with children because most others around you have them, and kicking yourself for not having studied your options at an earlier age. Or you might end up without children at an age when it’s too late to do anything about it, and regretting not having thought the issue through until it was too late.
Each and every one of us makes some sort of choice on both of these issues. The biggest distinction is whether our choices are conscious or not. The responsibility put on our individual little shoulders is greater than at any earlier time in human history. So our reluctance to discuss such sensitive issues means that, in many cases, critical matters are decided with little systematic thought.
Some who support the idea of having children (as do I) say that the decision should be made solely for non-financial reasons. I understand where they are coming from. But I think the reality is that this is a dated way of thinking that will be increasingly difficult to sustain. Once you make children a matter of choice in any respect, finances are a consideration. Perhaps not the only factor, but a consideration nonetheless.
For example, one might accept the idea to have children regardless of the effect on a Retire Early plan, but then also decide to limit the number of children. This means that financial issues are having an influence. Recognizing that many of us do indeed consider financial questions when deciding whether to have children or not puts us back where we started–needing a way to discuss whether having children helps or hurts in an effort to win financial freedom early in life.
If I had it to do over, I would have had many more children. It’s my one major regret in life. I consider this belief to be entirely in concert with the priority I put on retiring early. I favor putting paycheck dependence behind me as a means of putting more life into my days. And I favor having children as a means of putting more life into my days. So there’s no conflict in my mind.
But I know there are many others with different ways of looking at it. My purpose in writing this blog entry is not to offer a final pronouncement of the question. It’s just to pass along my conclusion that over time the pros and cons need to be aired, regardless of the sensitivities on both sides.
The issue of whether to have children or not doesn’t come up because people are trying to pick fights. It comes up because it is a basic aspect of what it means to be human, and because it has genuine relevance to the development of a successful Retire Early plan.
Humans are making choices about new sorts of things now, and they need lots more information to make good choices. Ultimately, whether to discuss the matter or not may be one of the few things over which at this point we really don’t have much “choice.” More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 25, 2007 16:30 – The Experts Speak on the Risks of Holding Overvalued Stocks in Retirement
I’ve added an article to the “Risk Evaluator” section of the site entitled The Experts Speak on the Risks of Holding Overvalued Stocks in Retirement.
Juicy Excerpt: Putting in historic returns in my opinion ensures you have garbage in and garbage out…. So if you rely on the Trinity study [an Old School SWR study] in my opinion that is garbage in and garbage out for the two reasons mentioned above–though the big problem is not the order but the overly optimistic returns. — Larry Swedroe (author of What Wall Street Doesn’t Want You to Know), Post to Vanguard Diehards board, November 16, 2005. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 26, 2007 14:24 – “An Ocean of Pain”
The New Jersey Star-Ledger ran an article today entitled Big Buying Sends Dow to Highest Level Ever. Here’s the text of the section of the article that reports on my views:
” ‘Investors should lower the amount of their wealth they devote to stocks because the downside is an ocean of pain,’ said Rob Bennett, who writes a financial blog for PassionSaving.com. Safe bets include IBonds, Treasury inflation-protected bonds and certificates of deposit, he said.”
I believe in looking at how stocks have performed in the past to gain a sense of how they may perform today. This is a controversial viewpoint. If investing were primarily a rational endeavor, I don’t think it would be. I think that the controversy is the result of the emotional attachment that many have to stocks today. Many want to believe that stocks can do things that they cannot do, and don’t like the reality check provided by the historical stock-return data.
I question whether it is even possible to invest in stocks without giving some consideration to what the historical stock-return data says. Do those who say that they believe that stock returns are entirely unpredictable really believe this? I’m not persuaded. Someone who truly believed that stock returns were entirely unpredictable would not invest in stocks. To put money into something without first forming any idea of the return that may be obtained for doing so is gambling, not investing. Truth be told, even many gamblers make an effort to learn something about the odds they are facing before putting money on the table.
What makes my views controversial is that I believe in looking at the historical stock-return data is an analytically valid way. That requires accounting for the effect of valuations. Ignore valuations, and the data shows stocks to be a highly appealing asset class at all times. Take valuations into account, and the data shows stocks to be a highly appealing asset class at most times and a generally unappealing asset class at times like today.
All of that is easy enough to understand. Yet many purport not to be able to make sense of my investing claims. This is one of the reasons why I reject the Efficient Market Theory, which posits that stock investing is an entirely rational endeavor.
People have a hard time hearing the message of the historical stock-return data at times like today because the message is one that they very much do not want to hear. The data shows that stocks offer a poor value proposition in the years following times when they have provided extraordinarily good returns. But it’s exactly at such times when people feel most comfortable investing heavily in stocks! The data is telling us that we are our own worst enemies, that we feel a strong desire to buy stocks at just the sorts of times when stocks are most dangerous.
We need to overcome our emotions. But how?
The first step is acknowledging them. The idea behind the Efficient Market Theory and all investing approaches rooted in a belief in it is to ignore investor emotions, to pretend that they do not exist. I see precisely zero evidence that that works. Paradoxically, it is those who acknowledge their emotions who thereby gain the power to invest rationally. It is those who deny that emotions can influence them who reveal themselves over time to be the most emotional investors of all.
I’m an emotional guy. I’m an unemotional investor.
Or so I tell myself. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 27, 2007 14:01 – Our Employers Should Encourage Us to Move On
Wall Street Journal Columnist Ron Lieber made an important real-world observation in a column from last June entitled “Forcing 20-Somethings to Save” (please see the “Buzz” section for a link). In a discussion of my argument that the best way to convince young workers to save is to point out to them that they will remain under the thumb of their employers until they accumulate some Freedom Dollars, he noted that: “If you are an employer, you might not put it quite like that.”
He’s pointing to something real with those words. It’s something that I find troubling. Employers don’t like to acknowledge that the most important sort of freedom that young workers should be seeking to obtain by saving is freedom from them. Still, it’s true. And I think it would be good if employers came to see that it really is in their long-term interest to communicate this truth to their young workers.
I am not anti-employer. All of my employers provided me learning experiences that were of value greater than the in-dollar-form compensation that I earned by working for them. The in-dollar-form stuff was nice too, of course. So I have no big beef with any of the companies that I worked for in the years before my Passion Saving plan permitted me to venture down a more independent path.
Here’s the thing. It was when I stopped looking to my employers to take care of me that I got serious about saving.
Many of today’s workers still think of their employers as part of the family. It’s not because they are too dumb to know better. Employers have long encouraged this sort of take on things.
And it has not been just words from employers that have caused many of us to think of our employers as our friends. Employers have paid our hospital bills when we got sick. Employers have provided us with recognition of our growth through pay raises and promotions and positive evaluations. Employers have provided us pensions when we got old. These are the sorts of things that family members and friends ordinarily do. It is not so hard to understand why many workers have come to think of their employers as more than just employers.
There’s been a change in the nature of the relationship in recent years. Employers are saying that they can’t handle financing our old-age retirements anymore. They are saying that we need to contribute to our health insurance coverage. Employers are pulling back.
There are sound economic reasons for them doing so. The world is changing. To remain competitive, our employers need to be more businesslike in their relationship with us and that means being less friendly or family-like in their dealings with us.
When our employers become more businesslike in their dealings with us, we need to become more businesslike in our dealings with them. If we don’t, we are going to pay a big price somewhere down the road for failing to do so.
Employers should encourage us to assert a measure of independence from them. I don’t mean that they should become heartless. I don’t favor that at all. But employers should encourage us to focus on our own long-term self-interest in all our dealings with them. It’s not healthy for employers to encourage us to think of them as family when they know that they will need to become very unfamily-like in the next recession.
Employers need to shoot straight with us. That means making clear that, while they value our contributions, they are not family and they are not friends and we need always to keep the distinction in mind.
Workers should not abuse their employers. We should not expect them to provide us things that they are no longer able to provide us. We should work hard at the work we have agreed to take on for our employers. We should speak well of our employers when they do things that justify our praise. We should appreciate our employers. We should like our employers. We should be grateful for the opportunities offered to us by our employers.
We need to stop looking to our employers to protect our long-term interests. We need to accumulate our own Freedom Dollars to provide not only for our old age, but also for taking advantage of work opportunities that we want to create for ourselves long before we reach old age.
My seven-year-old is well on the way to learning how to read. It makes me sad in a way because he will soon be far less dependent on daddy to tell him about the world than he is today. It makes me more happy than sad, of course, because it excites me to see him learning how to take on the world on his own without help from daddy.
That’s how employers need to think about their workers. Employers should be warning us that there may come a day when we outgrow them and they should be encouraging us to save the Freedom Dollars that will help us move to better paths when the time comes for doing so. Things need to move in that direction if the employer-employee relationship of the future is to be a healthy one.
Young workers really should be saving in part to escape their current employers. Employers need to get over feeling threatened by that new reality of the modern-day workplace. More on This Topic
To reference this entry please copy the url in this link: (Permalink)
April 30, 2007 14:25 – Tithing for Non-Believers
I’ve added an article to the “The Turned-On Budget” section of the site entitled Tithing for Non-Believers.
Juicy Excerpt: I am the world’s greatest rationalizer and, once I go down the road of thinking of the work I do as a charitable contribution, I can see the devil whispering in my ear that there is no need to engage in the financial kind of giving at all. It’s my job to resist that argument, and it’s the job of any modest-income worker who resists the call to secular tithing to resist that argument. Still, I believe that you can give through the work you do as well as through the checks you write.
To reference this entry please copy the url in this link: (Permalink)
March 2007 << >> May 2007