At a conference on financial literacy on Apr. 20 in Chicago, Federal Reserve Chairman Ben Bernanke said it was time for Americans to learn to manage their money.
Ramit Sethi couldn’t agree more. The 26-year old personal finance guru has made it his mission to help Americans do just that and he tries to make it as simple as possible.
In his new book, I Will Teach You to Be Rich, and on his blog of the same name, Sethi shows twentysomethings how they can automate their financial decision-making and learn how not to overanalyze.
This is especially true when it comes to investing. He says money should be automatically diverted to investment accounts, then automatically invested and rebalanced, according to a set calendar.
Sethi met with BusinessWeek’s Ben Levisohn on Apr. 17 to discuss how fearful investors can get started in this vexing environment.
You’re only 26. How did you start investing?
When I was in high school, I applied for a number of scholarships because my parents told me we had to. The first scholarship, for $2,000, was written to me and I invested it in the stock market. This was back in 2000. I lost a lot of money. I still have some of those stocks. One is worth 90% in total. I probably lost 99% of that money. That was a great eye-opener. It made me realize that just because you see a stock on TV that does not mean you should invest in it. Just because you’re wearing clothes from Gap doesn’t mean it’s a good investment. That’s when my eyes started to open. But if you ask most people, “hey, what investments do you have,” they say, “you mean stocks?” Which causes me to throw my hands up in the air.
So you’re not a big believer in buying individual stocks. How should people invest?
I want to reduce choice and encourage people to invest. For most, a target date fund is perfect. That’s the 85% solution. It’s not perfect, but it’s good enough. There’s no need for people to rebalance by themselves. The fact that we have 60- to 70-year olds losing 50% of their money speaks volumes that just because you should rebalance your investments, it doesn’t mean you will. Just like you should practice safe sex does not mean you will.
But what if investors want a little more control?
If you really want to tweak it, if you’re a type-A nerd and you’re reading about all different asset allocations, then let me show you how to do this. Here’s a recommendation: the Swensen model, by Yale’s Chief Investment Officer David Swenson. Take this and tweak it as needed. (The Swensen Model allocates 30% to domestic equities, 15% to developed world international equities, 5% to emerging-market equities, 20% to real estate funds, 15% to government bonds, and 15% to TIPs.)
But we need to build systems around automating rebalancing so people are not depending on more will power. Investing and personal finance — we’ve shown that it’s not about more will power. It’s about creating systems that do this by default for us.
So you wouldn’t recommend trying to time the market?
There are people now who pulled their money out. And when the market comes up, they will be some of the last that get in. It drives me crazy. They think this is binary. You either put money in the market or pull it out. That’s not how investing works. There are so many gradations and nuances. You can change asset allocation, you can diversify differently, you can change your time horizon. There are a million things you can do. If you try to time the market, then you are a fool. I’m trying to focus on the long term. I really believe in investing for the long term.
Have you changed your outlook because of the bear market?
I was given the opportunity to completely revamp the book in light of the crisis, but the material stands on its merits. What I tell people is that what’s in the newspaper today and what President Obama decided to do today has very little to do with your personal finances. Personal finances are personal. You can turn off your TV, close down all the Web sites for the next six weeks, and your finances, if you optimize them, would get much better regardless of what happens.
Young investors have watched their parents lose a good chunk of their retirement savings. What do you say to them to coax them into the market when they may feel like socking away their cash in a mattress?
Although it seems catastrophic, we’re in our twenties and thirties and essentially the market is on sale. If I told you one year ago that the market would be 50% off for the same equities you’re buying now, what would you have said? The answer, of course, is I would have been ecstatic. Now there’s a lot of psychology and uncertainty involved and that’s changing things.
How have your investments done in this environment?
I’m roughly indexed, so I was basically in line with the market.
Did you expect these kinds of losses?
I was surprised. The models don’t predict this loss typically. We know there are a lot of problems with models. But as a young person, I’m comfortable knowing I can afford that kind of risk. I was consciously invested and am still consciously invested in a risk seeking way. My readers in their twenties and thirties who are invested are interested in the same. They understand this is a long-term play. They understand there are trade-offs. I’m comfortable knowing that not only do I have a long-term perspective, I’m comfortable managing money, earning more, so it can flow back into my infrastructure.
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Smart Money Moves for Young Investors
BOSTON (MarketWatch) — Virginia S. lives in the Toledo, Ohio area and is nearing retirement as teacher at a religious school.
These days, she is having trouble with her faith.
That’s not a comment about her religion, but rather about maintaining her confidence in the stock market and economy, and hanging on to her belief that years of planning on a modest salary will pay off.
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 ”I keep hearing experts say that consumer confidence is important, but I don’t see anything that could make me confident,” Virginia said via email. “I have time and I wouldn’t mind working longer, but I’m not sure I see it all paying off any more. Why, exactly, would anyone expect someone like me to be confident? What reason do I have to be confident?”
Virginia is far from alone in her flagging sense of trust in the market. On Tuesday, Investor’s Business Daily released its August figures for the IBD/TIPP Economic Optimism Index — an indicator that typically does a good job of foreshadowing what to expect from more renowned consumer confidence benchmarks released later in the month — and it showed a nice pop in good feelings. That said, the 14.4% pick-up in August left the IBD index at 42.8, which is still deep in pessimistic territory.
Looking ahead
Between the housing bubble, credit crisis, inflation worries, concerns over the weak dollar, the potential for the economy to drop into a recession, a stock market that seems more anxious in falling than rebounding, and more, it’s hard to believe an investor could have any faith and confidence left.
Those flames of despair are fanned in chat rooms and message boards by market timers, who suggest that the best way to go is to be out of the market, or following some specialized system, the kind of thing an average investor like Virginia is not likely to do.
In times like these, it might seem as implausible as the existence of Santa Claus, but yes, Virginia, there are reasons to be confident.
Without sounding like a Pollyanna, here are six of them.
1. Market cycles have not been suspended.
While investors have internalized the idea that stocks return 10% annually, that’s an average figure, and no one should believe the stock market is a guaranteed payout machine.
But down cycles have invariably led to up cycles. While many market observers suggest that people should expect the market to deliver an average of 7.5%-8% on average for the next 25 years, it still won’t be a straight-line result.
“If the time you are buying into that average annual return is negative or zero or two, you can expect that somewhere during your investment life there will be a catch-up period,” says Kathy Kristof, author of “Investing 101.”
It would be great if you could avoid the pain and simply invest during the hotter catch-up time, but most people don’t have that kind of vision or timing.
2. The one place your dollar is going further, these days, is the stock market.
Americans are known for being great consumers and lousy savers, but they stink at buying stocks when they go on sale. The same people who would rush out to the mall the next time they hear about a sale on shoes would run away from high-quality companies that are likely to pay for their shoes five or 10 years down the road.
Great companies will survive bad markets; they won’t always be cheap.
3. Numbers don’t lie, but they can confuse the heck out of people.
If you want to view the glass as half-empty, you can produce market statistics that show the decline in 2008, or a time frame which shows a long stretch where the annualized average gain on the market was 0%.
If you want to show the glass half-full, you ignore the current pain in favor of five-year numbers which show gains of nearly 8% annualized over the last five years, despite the recent pain.
Find the numbers that are most important to you, the ones that act as a cornerstone to your philosophy and decisions. There are many ways to read the market, and more than one picture is correct, but what matters most is what you believe in.
Spend less time worrying about whether the glass is half-full or half-empty and more time worrying about what is in the glass. If you like the looks of the market long-term, then it’s like a glass of your favorite cocktail or brew, and it’s easy to see it as half-full; if you’re lacking confidence, it looks like a glass of mud, and you’re hoping it’s half-empty because you don’t want to choke it down.
4. Diversification is better than the alternative, even when it means that parts of your portfolio are hurting.
If you pull all of your money from the market, you avoid principle risk — the chance that you lose money in the market — but embrace purchasing-power risk, the chance that your money won’t keep up with inflation.
Since financial harm happens in many different ways, the best way to keep your cash out of harm’s way is to expose it to many different forms of danger.
5. Working a bit longer — and putting off Social Security — will do things for your retirement nest egg that regular savings didn’t get done.
Research released recently by T. Rowe Price Associates shows that postponing retirement and waiting longer to take Social Security will dramatically increase the staying power of your retirement savings. Christine Fahlund, senior financial planner for the T. Rowe Price Group, says that delaying retirement and Social Security from age 62 to age 70 can double a person’s income in retirement.
Working longer may not be anything to crow about, but it is possible to play catch-up, even in times when the market is not giving you much help.
6. It feels so bad, but it hurts so good.
Typically speaking, the best investment decisions are the ones that feel the worst when you are making them, the ones that try your faith and confidence.
For someone like Virginia, having confidence can be its own reward. In the words of Saint Augustine: “Faith is to believe what you do not see; the reward of this faith is to see what you believe.”
Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.
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Investors: Stand by your plan
~ by Robert Kiyosaki
If you’re serious about getting rich, now is the time. We’ve entered a period of mass-produced pessimism, when bad news is everywhere, and the best time to invest is when optimists become pessimists.
The Weird Turn Pro
Journalist Hunter S. Thompson used to say, “When the going gets weird, the weird turn pro.” That’s true in investing, too: At the height of every market boom, the weird turn into professional investors. In 2000, millions of people became professional day traders or investors in dotcom companies. Mutual funds had a record net inflow of $309 billion that year, too.
In an earlier column, I stated that it was time to sell all nonperforming real estate. My market indicator? A checkout girl at the local supermarket, who handed me her real estate agent card. She was quitting her job to become a real estate professional.
As a bull market turns into a bear market, the new pros turn into optimists, hoping and praying the bear market will become a bull and save them. But as the market remains bearish, the optimists become pessimists, quit the profession, and return to their day jobs. This is when the real professional investors re-enter the market. That’s what’s happening now.
Pessimism vs. Realism
In 1987, the United States experienced one of the biggest stock market crashes in history. The savings and loan industry was wiped out. Real estate crashed and a federal bailout entity known as the Resolution Trust Corporation, or the RTC, was formed. The RTC took from the financially foolish and gave to the financially smart.
Right on schedule 20 years later, Dow Industrials and Transports struck their last highs together in July 2007. Since then, nothing but bad news has emerged. In August 2007 a new word surfaced in the world’s vocabulary: subprime. That October, I appeared on a number of television shows and was asked when the market would turn and head back up. My reply was, “This is a bad one. The worst is yet to come.”
Many of the optimistic TV hosts got angry with me, asking me why I was so pessimistic. I told them, “The difference between an optimist and a pessimist is that a pessimist is a realist. I’m just being realistic.”
As we all know, things only got worse in early 2008, with the demise of Bear Stearns and the Federal Reserve stepping in to save investment bankers. In February, many of those optimistic TV (and print) reporters became pessimists — and when journalists become pessimists, the public follows. By March, mutual funds had a net outflow of $45 billion as investors fled the market.
Surviving the Bad Times
Back in 1987, as savings and loans closed and investors’ stock and real estate portfolios were wiped out, my wife, Kim, and I were living in Portland, Ore. Many people were depressed and hiding from the truth. The following year, I said to Kim, “Now is the time for you to begin investing.”
In 1989, she purchased a two-bedroom, one-bathroom house for $45,000, putting $5,000 down and earning $25 a month in positive cash flow. Today, she owns over 1,400 units and — because more people are renting than buying — she earns hundreds of thousands a year in positive cash flow.
The period from 1987 to 1995 was a rough one, even for the rich. In his book “The Art of the Comeback,” my friend Donald Trump writes about being a billion dollars down at the time. Rather than give up, he kept on fighting to survive. He and I often talk about how that period was great for character development.
Two-Year Warning
I believe we’re through the worst of the current bust. I know there will be more aftershocks, and the news will continue to be pessimistic for at least two more years, possibly until the summer of 2010.
But the upside to this is that it gives us at least two years to do our market research and find the next big stock or real estate bargain. Before buying, I strongly suggest you study, read books, and take courses on your asset of choice. If your choice is stocks, take a course on stocks or options. If it’s real estate, take a course on real estate. Now is the time to learn; not only will you know more than the average person and be in a good position when the market turns, but you’ll also meet people with a similar mindset.
You have about two years to get into position. Opportunities this big don’t come along often, so this is your time to get rich.
Climbing Bulls, Flying Bears
Am I optimistic for the long-term? Absolutely not. I still believe we’re due for the mother of all market crashes, and that the U.S. economy is running on borrowed time — and I do mean borrowed. I think most baby boomers are in serious financial trouble, and that oil will climb above $200 a barrel. Inflation will also increase, causing more pain for the poor and middle class.
The Fed is flooding the market with nearly a trillion dollars of liquidity, which is why I believe gold under $1,200 an ounce and silver under $30 an ounce are bargains. Gold and silver should peak and decline before 2020, completing two 20-year cycles. My exit is to sell silver around 2015. I plan to hold onto gold, income-producing real estate, oil wells, and stocks.
Most of us know the bull climbs slowly up the stairs, but the bear jumps out the window. I believe the bull is still climbing the stairs, and the bear hasn’t jumped yet. But rest assured that it will.
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When Pessimism Prevails, It?s Time to Get Rich
  - Ben Stein
Now for some reassuring words. Of all of the columnists writing in this space, I suspect I am the oldest. This means I have seen the most economic fluctuations. This also means I am less terrified about them than younger heads.
Let me put this differently. I read recently in The Wall Street Journal that the stock market was at the time of that writing almost in “Bear Market Territory,” which is to say, down roughly 20% or more from its high. This, said the author of the piece, shows that we are about to have very bad economic times. The author helpfully noted that the market has been down into “Bear Market Territory ” some nine times since the mid-1960’s. Without doubt, this author was trying to do his best, and to serve his readers.
But here’s a relevant addendum: yes, the market may have fallen 20% or more nine times since then. But there have only been five recessions since then.
That is to say, the stock market predicts 10 out of five recessions. Not such a great record.
The truth is that while the economy is clearly slowing down we are not yet in a recession. There has so far not even been one quarter of negative economic growth, nor even a break-even quarter. We may well have one soon, but two in a row are required for the classic definition of a recession. And as I keep saying, if anyone can call anything a recession, the whole subject loses all intellectual or factual meaning. This too could happen-a real recession-but it has not happened yet.
There are still reasons for hope. Exports are phenomenally strong. Minerals and agriculture are strong. Medical is strong. The government sector is large and robust. Sadly, military must remain strong indefinitely.
The government is running an immense deficit, and this is stimulative. True, finance is in tatters, as is transportation, refining, and home building. These are large sectors. They may fall so much that they bring the economy into recession.
But think about this: somewhere out in the big wide world, there is voracious demand for minerals and commodities. That (along with speculation) explains their major price increases. It would be extremely rare for there to be a spectacular worldwide demand for commodities along with a serious fall in demand for other factors in an economy. That is, it would be rare for demand to be both rising and falling at the same time. It could happen, but it would be rare.
However, let’s assume we do have a recession. I hope we don’t, but we might. What do we do about it? What can we do about it? Just keep plugging along. Just keep buying broad indexes. Just keep a good chunk of liquid assets. None of us can control the economy. Thus, we just have to keep swimming in the roiled waters.
As we cling to our life jackets, please remember this: no recession lasts forever. I can well recall so many times in the past when every single headline in The Wall Street Journal was about some record growth of sales or profits. Then time passes and every single headline is about horrible news. Then time passes and there is mixed news, and then it’s all good news again.
Economies go through cycles. But the long-term trend is up, and people who buy broad indexes when the news is bad, if they live long enough, live to be happy about it.
Besides, what alternative do you have? If you have money to invest, yes, keep some in cash. But cash loses its value in inflationary times. In fact, holding cash over long periods – beyond what you need for peace of mind – is a surefire way to make yourself unhappy. You will lose money on it over long periods as inflation nibbles at it.
The best bet usually is what has gone down the most, and that, for now, is real estate. I got a letter from a thoughtful reader saying he was going to wait until real estate had reached its all time low before he bought. But how will he know? And how rarely does he find a home he truly loves? Even when homebuyers buy at the top of the cycle, if they love their homes, and if they can hold on, they always end up delighted.
Yes, there will be news saying housing will not recover THIS TIME. But in fact, except in really depressed areas, housing recovers EVERY TIME and goes on to pass its prior record. The real story of real estate, as my brilliant money manager friend, Phil DeMuth, says, is of failing to buy, not of staying away successfully.
The plain fact is that you don’t know when real estate will be at bottom until it’s too late. If you see a home you love, buy it now if you plan to be in it a long time. And know that the headline writers want to whip you up and make you crazy about the economy. They sell fear. Stay calm and stay well to do.
Excerpted from:
Don?t Panic – Buy Index Funds and Real Estate
When I first made contact with Cathy Stucker I was on the phone with her for at least an hour and a half. We covered so much ground in that time I should have recorded it. However, since we were all over the place we decided to narrow it down and just cover one topic this time. The topic is “how to promote your book(s) on Amazon.com. I found Cathy while reading John Kremer’s book 1001 Ways to Market Your Books, Sixth Edition.
Cathy Stucker is an author and focused on a couple of niches, including mystery shopping and wrote Mystery Shopper’s Manual, 6th Edition. The one discipline where Cathy get’s it right is Learn it, Do it, Teach it, this is her business model. You get the feeling that if you want to get something done all you have to do is ask Cathy how to do it, and if she doesn’t know how to do it she will in short order. Cathy is a person of action, she is an excellent person to model with the can do attitude.
This is a great interview for anyone who wants to market books and music on Amazon. It is especially great for bloggers who have books on Amazon. In this interview you will be able to master Amazon in less than an hour.
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How to Market Books on Amazon.com Interview with Cathy Stucker
