Book Giveaway: Why are We So Clueless About the Stock Market?

June 13th, 2010  |  Published in General  |  13 Comments

This week’s book giveaway is for the book, Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market. The purpose of this book is to help readers understand the basics of stock market investing. Material covered includes the difference between stocks and businesses, what constitutes a good business, when to buy and sell stocks, and how to value individual stocks. The book also includes a chapter covering four case studies as well as a supplemental chapter on the pros and cons of real estate versus stock market investing.

To make this giveaway a little sweeter I am also going to include a copy of the 2010 New Yorker Desk Diary. To enter the contest just leave a comment. The winner will be chosen at random Friday June 18,2010. Limit one entry per person. Entrants with U.S. mailing address only please in order to keep my shipping costs down. I reserve the right to make other rules in the interest of fairness. Thanks and good luck!

Earning $20,000 Equals Half Million Dollar Nest Egg

March 22nd, 2009  |  Published in Retirement  |  4 Comments

With the recent stock market fall, a lot of near-retirees are seeing their nest eggs fall below their “Number,” the amount they need to retire comfortably. This has, rightfully so, a lot of near-retirees worried. What should a near-retiree do? Draw on Social Security early so that the retirement assets can recover? Pull out of the stock market and lick your wounds? Continue working?

Bingo. Option 3 appears to be the most viable and least damaging, but the scariest especially if you’ve been staring at a date on a calendar for the last year or two. Drawing on Social Security before your full retirement age reduces your benefit, so that’s a hit you want to avoid. Pulling out of the stock market locks in the losses, something that probably isn’t all that appealing. Working… well, if you’ve eyed retirement, another year of work probably isn’t your cup of tea.

The answer? Maybe something part-time if you’re tired of your current job. If you were to take a job for $20,000 a year, you effectively increase your nest egg by half a million dollars. The general rule is that you should draw 4% of your nest egg each year. At 4%, your nest egg’s appreciation will slow down the draw down long enough for you to fund the remainder of your retirement years. When you earn $20,000, that’s $20,000 you don’t need to draw from your fund. That $20,000 represents half a million dollars in your nest egg.

Now the difficult part is finding a $20,000 a year job in this economy.

Don’t Check Your Retirement Account Balance

September 17th, 2008  |  Published in Investing  |  3 Comments

This really only applies to people who are decades away from retirement.

This week started off rough. Merill Lynch agreed to be purchased by Bank of America, Lehman brothers filed for bankruptcy protection, and AIG looked about fifteen minutes away from also filing for bankruptcy protection. On Monday, the Dow Jones Industrial Average fell over five hundred points, it’s largest drop in six years. Five hundred points… or around 4%. It wasn’t alone though, all the other major indices posted huge losses too and were quickly followed by all the major Asian indicies who fell 5-6%.

That’s when I logged into my Vanguard account to check out my retirement accounts. They were all red. The sad thing wasn’t that they were red, they’ve been red since last year, but they were in deep.

That’s when I realized something… don’t look at my retirement account balances. Just don’t. I can’t touch those retirement account assets until I’m sixty, which is over thirty years away for me. I rebalanced them late last year and my target retirement date is around 2040, so these swings (even though they’re huge) shouldn’t affect my thinking.

Poverty Effect

The Wealth Effect is a phenomenon where people spend more because they are or feel richer. One of the ways people feel richer is when they see paper profits on their brokerage holdings lists. When a stock does well, people feel richer even though they haven’t realized the profits yet. Likewise, the reverse is also true (the Poverty Effect). If you look at your portfolio and see huge losses, it’ll have an effect on your thinking. You’ll do something rash like sell your holdings in the target retirement 2050 fund when you should really wait.

You Shouldn’t Do Anything Anyway

What happens if you retirement funds have a one day surge and you’re up big? Are you going to sell it? Of course not, you’ll smile, the wealth effect will make you feel warm and fuzzy, and you’ll go about your day. That’s the same way you should react when you see a big drop. You should do nothing. So, skip the poverty effect and save yourself some grief by not checking.

Don’t Compulsively Check Your Retirement Investments

July 31st, 2008  |  Published in General  |  1 Comment

I have a nasty habit of checking stuff all the time. Whether it’s the traffic stats on my blog or the performance of my retirement investments, I feel a compelling need to “check in” on things all the time. How often is all the time? I once checked how many times I checked stock prices while I was work and it was 14 times. Fourteen! Whenever I had a little break, I just typed in tickers into Google to check and I did it fourteen freaking times.

I didn’t need to check that often.

In fact, there’s a reason why financial markets have worked for so long without the internet. Remember when you could only get stock prices the next day in the morning paper? It’s because you only needed to know about stock prices once a day – the next morning over coffee.

There’s really no point to checking your retirement accounts everyday, especially if you’re like me and many years away from retirement. What happens today, tomorrow, or even anytime this year, should have no effect on my decisions if my retirement is twenty years away or thirty or forty. In 1987, the stock market lost 22% of its value in one day; but we’re still here and still humming along.

So, don’t check every day, just check it once and a while. I’ve trained myself to check my investment holdings only once a day, in the morning, and my retirement accounts once a month. I still check my traffic stats all the time though. 🙂

Bear Market Means Stock Market Discounts

July 22nd, 2008  |  Published in Investing  |  3 Comments

I you’re a young investor, with decades before you’ll need the assets in your retirement portfolio, this bear market should make you happy. While it’s difficult to swallow the losses your retirement account has made, think of it as a 20% discount on what you’ll be buying over the next few years rather than a 20% loss of the assets in your retirement account.

Since the high in the market last October, my retirement accounts have lost thousands if not tens of thousands. It’s hurt. But, I’m only 27, nearly 28, and with another forty years of retirement saving left in me it’s actually a positive that the market has gone down. As much money as I may have in my retirement assets now, I doubt I’ve even contributed 10% of what I will eventually contribute towards retirement. The 20% discount young investors are now getting, which will benefit the 90% of retirement savings we have yet to do, outweighs the 20% loss we’ve experienced on the 10% we have contributed.

It wasn’t until today that I full appreciated what all those investment magazines and books had said. A broad market decline is good for young investors, bad for poorly diversified older investors nearing retirement, and now I actually believe it.

How will this change my behavior? It won’t. I still make my regularly scheduled contributions, though rebalancing will be a little more active the next time we look at it.

10 Rules: Stocks, Stocks, Stocks

December 26th, 2006  |  Published in Asset Allocation  |  Comments Off on 10 Rules: Stocks, Stocks, Stocks

The seventh tip of Forbes ten rules for building wealth deals with “proper” asset allocation and that you should be investing more in stocks and less in anything else. Their rule of thumb? 120 minus your age should equal allocation percentage in stocks and the rest should be put in bonds.

Stocks are usually more volatile than many other vanilla investments (unless you start playing in the big pool with derivatives) but the idea is that what happens the next few years won’t affect your long term plan, which will come to fruition in thirty or forty years. This is also the concept behind target retirement and lifecycle funds, to move assets away from more volatile investments like stocks as you near retirement.

Source: Fortune

10 Rules: Don’t Chase Trends

December 23rd, 2006  |  Published in Investing  |  Comments Off on 10 Rules: Don’t Chase Trends

One of things that a lot of people do, without even thinking about it, is the topic of this particular tip. Human beings have a natural herd mentality and so when there are trends, people want to be a part of it whether it’s bell-bottom pants or its investments. During the dot-com bubble that burst in 2001, money flowed into the industry like crazy. This past year, money flowed into energy and gold like crazy. When ETFs were first introduced, money jumped from mutual funds to ETFs like it was going out of style. The fifth tip of Forbes ten rules for building wealth is that smart investors should not chase trends.

The logic behind this tip is that you’re in it for the long haul and that you shouldn’t switch your long-term strategy for the next hot thing that comes along. Not only shouldn’t you make these course corrections because its not part of your grand plan (and because by the time you see it, it has already peaked), it’s also expensive to be jumping around to the hottest thing.

This is what Forbes says you should ask yourself if you do decide to jump:

Can I describe how it works in plain English? If not, start your research at Why is it so popular right now? If the answer is “Paris Hilton bought some,” best to stay away.

Source: Fortune

10 Rules: Don’t Try To Beat The Market

December 23rd, 2006  |  Published in Investing  |  Comments Off on 10 Rules: Don’t Try To Beat The Market

I wholeheartedly believe in this fourth tip of Forbes ten rules for building wealth of not trying to beat the market. Honestly, you have better things to do with your time than research investments and you should be doing those, instead of checking PE ratios, growth rates, and the like.

Strangely, Forbes focuses a lot on asset diversification and portfolio balancing in this tip and a little less on convincing a reader to go with some index funds. While I think the underlying idea is that you go with funds anyway (building on the idea of keeping things simple), they don’t make mention of it in this particular tip.

One tool that they mentioned that is worth checking out is Morningstar’s free Instant X-Ray tool.

Source: Fortune