Invest in innovation, not exploitation

The Thinker by Rodin

America is a supposedly country that rewards innovation. The trouble is, a lot of this innovation is really exploitation. I looked into this briefly a few posts back when I looked at Lyft and Uber’s “innovation”. The only really innovative part about these ride services is their app. They’re both cheaper and generally faster than taking a taxi. So much for the innovation part. The rest of it is pure exploitation, mostly of its drivers who get cash up front that doesn’t begin to pay a living wage, particularly if you consider the wear and tear on their cars.

These days much of what passes for innovation in our economy is finding newer and cleverer ways to exploit people, who are generally among the most vulnerable among us. Granted, this may be as American as apple pie. We bought Manhattan from the Indians for the price of some trinkets. These days, the exploitation is less overt. But even if you don’t use Lyft or Uber, you don’t have to look far to see examples.

At the macro level, large companies that pollute exploit us all. Their cost of business is discounted by using our air and rivers as a sewer, and we pay the price. Tens of thousands of Americans die from air pollution every year, and the Trump administration is doing its best to make sure more of us will die. Generally though it’s the poor and vulnerable that get exploited. This is our innovation economy at work.

Perhaps you saw John Oliver’s recent show on mobile home investing. This is exactly the sort of “innovation” that I wish we could outlaw. By definition, if you live in a mobile home you don’t make a whole lot of money. You might own your mobile home but in most cases these homes are not truly mobile. And if you wanted to pack up your mobile home and move it elsewhere, you probably can’t afford to do so. In most cases your mobile home sits on a lot that you rent. There are plenty of investor groups buying these properties and regularly jacking up rents, knowing they have a captive audience. Some say this is a great way to earn “passive income”. What you are really doing of course is exploiting the least among us. In many cases these people are skipping medications or food to pay these rent increases. Some abandon their property, which is repossessed and resold to the next exploited victim.

I’m not prone to anger but these sorts of schemes make me positively irate. They should be outlawed. There are all sorts of ways we pick the pockets of the poor among us: pay day loans with incredibly usurious interest rates, lotteries that take their money but rarely pay off, casinos with a similar idea, higher prices for substandard food because supermarkets won’t serve their communities and of course the traditional: substandard public schools that are grossly underfunded because wealthier school districts won’t share their wealth. If that’s not enough, we shame them for taking food stamps or trying to compete for the vanishingly small market of affordable housing.

Most of us though don’t distinguish between companies that make money via exploitation versus innovation. That’s because it requires research, thinking and our capitalist system sees nothing wrong with exploitation. Look at some of the recent IPOs. How many of these are really driving innovation? Lyft went IPO, but Uber was first to this market. Lyft’s app is not noticeably better than Uber’s. Both depend on exploiting drivers and frequently change their payment terms to drivers to increase their revenues at drivers’ expense. Both are working hard on autonomous car technology. They can’t wait to boot their drivers altogether because they’ve run the numbers and maintaining a fleet of autonomous cars is way cheaper than even exploiting their drivers.

Some companies are both exploitative and innovative. How should I feel about owning Amazon stock, which I probably do somewhere in a mutual fund or ETF in my portfolio? Most of Amazon’s model has been exploitative: they’ve undercut competitors by sustaining losses funded by investors until competitors are out of business. I can see the problem locally with so many vacant storefronts. These customers are using Amazon instead.

Amazon was shamed enough by Bernie Sanders so that they raised their wages to $15/hour, which is good, but it’s barely a floor for a survivable wage. Meanwhile, they are finding other ways to “innovate”, most recently by creating their own air fleet that innovates by screwing their pilots. But other parts of Amazon are truly innovative. Amazon Web Services was a completely new idea that Amazon figured out and which fundamentally changed computing, dramatically lowering computing costs, increasing uptime for connected systems and spurring all sorts of innovation in information technology. Its web services are now the most profitable part of Amazon’s business. It’s proven extremely profitable for Google and Microsoft too, who have pockets deep enough to compete in this market.

Ideally I would not own any stock in companies that are exploitative. But like most of you I suspect, I don’t own any stock directly. Instead, I own mutual funds, ETFs and bonds. Mutual funds and EFTs are collections of ownership in lots of stocks. I could own a commercial bond for a specific company, but even here most of these are amalgamations of lots of bonds funds. There’s no easy way to invest in pure innovation, and hard to avoid investing in exploitative companies.

It’s not entirely impossible, however. You can invest in “green” funds and there are some socially active funds that avoid investments in arguably “evil” countries, which include Israel, which is effectively an apartheid state. Kiplinger has some suggestions for this kind of investing. But it’s not easy and in some cases impossible.

For example, if your company does not allow you to invest your 401K in funds like these, you have no options and may pay a penalty for doing investing outside of your 401K, particularly if your employer makes matching contributions to your 401K.

Which is why in the end what you can do is limited, unless we had a progressive Congress that changed investment laws. At a minimum they could require companies offering 401Ks to provide options for employees who want to invest in funds that are innovative but not exploitative.

I am overdue for a talk about this with my financial adviser. Frankly, I wasn’t thinking much about this until my recent trip on Lyft. Much of our portfolio has moved with retirement from 401Ks to IRAs. These could be shifted toward funds that reward innovation and socially progressive. Fortunately, I have a call with him tomorrow.

Republicans continue to make the rich richer and the poor poorer

The Thinker by Rodin

It’s pretty hard to keep up with the inanities coming out of the mouth our “president”. As a Democrat he sure embarrasses me, but I often wonder why Republicans are not. If retiring Senator Bob Corker (R-TN) is correct, most Republicans in Congress are embarrassed by Trump, but can’t summon the political will to say so.

Trumps tweets and remarks get weirder and weirder. This is probably due to 50% ignorance and 50% cognitive decline. Still, it’s quite embarrassing. Yesterday, a day after his Secretary of Energy Rick Perry declared that Puerto Rico was a country, Trump told a convention of evangelicals that he has spoken with the “president” of the Virgin Islands. So two top administration officials including our “president” don’t understand that both Puerto Rico and the Virgin Islands are American territories. What’s next? Sending in the marines to take over these “countries”?

Yet on such capable shoulders we are entrusting our nation. The only thing seeming to restrain Trump from his worst impulses seems to be a few officials, principally Chief of Staff John Kelly, Defense Secretary Maddis and Secretary of State Tillerson. They are our firewall of sorts, although there is no guarantee they can restrain Trump. Reportedly they have a suicide pact: if one gets fired they all resign. In any event depending on one unflagging Chief of Staff to babysit Trump 24/7/365 doesn’t seem like a great plan. Trump might launch nuclear weapons against North Korea while Kelly is in the bathroom.

So what does all this have to do with the rich getting rich and the poor getting poorer? Nothing really. I am just venting. But in the boatload of stupid that has come out of Trump’s mouth and Twitter feed recently, there was this from his interview with Sean Hannity on Tuesday:

The country — we took it over and owed over 20 trillion. As you know the last eight years, they borrowed more than it did in the whole history of our country. So they borrowed more than $10 trillion, right? And yet, we picked up 5.2 trillion just in the stock market.

Possibly picked up the whole thing in terms of the first nine months, in terms of value. So you could say, in one sense, we’re really increasing values. And maybe in a sense we’re reducing debt. But we’re very honored by it. And we’re very, very happy with what’s happening on Wall Street.

Aside from the numbers themselves that are off, there is the amazing conclusion from Trump, a graduate of Wharton. Remember, Trump recently bragged that he could beat Rex Tillerson in any IQ test. Trump apparently thinks that gains in the stock market cancel out federal debt. This is surprising in itself, but apparently it only works if he is in office. It doesn’t apply to the Obama administration, which saw the longest sustained growth of the stock market in history. There is no doubt that the stock market is doing very well since he took office, but it’s not doing appreciably better than it did under Obama. Those of us with lots of stocks are just seeing our pile of wealth get larger and larger.

I certainly see it in our portfolio. We take $1900 a month out of it to supplement our retirement. Just our investments (almost all of it in retirement accounts) amounted to $795K on February 1, and is now valued at $857K. Add in our house and other assets are we are millionaires, if a net worth of about $1.41M means that much these days. Gains in the stock market though create wealth only for those who own stocks. Guess what? Many of those who voted for Trump don’t have much if anything invested in the stock market. That’s due in part because there is little money left over to invest in stocks. According to one study, in 2013 the top 1% alone owned 38% of the stock market. The top 10% owned 81.4% of stocks. That leaves 19% for the rest of us. I may be technically a millionaire but rest assured my assets are part of that 19%. In reality I am not even close to being rich, at least not by the standards of the top 10%. I sure don’t plan to buy a Tesla or fly on a private jet to Monaco.

To make money in the stock market though you need to invest regularly over many decades and hold onto the assets. And that’s only possible if you have money left over to invest in the first place. It also means that you also need a relatively secure job, so that you are not raiding your nest egg in lean times. You also need it just to get through recessions and downturns with your investments able to wait out the hard times. If you don’t have all these factors in your favor you probably won’t be investing much in stocks and if you do it will be periodic retirement investments during relatively flush times.

So the surging stock market is really creating wealth principally for the rich who already have plenty of it, exacerbating income inequality. At best its effect for the rest of us is indirect, perhaps by keeping unemployment low thus maybe pushing up wages a bit, or by stimulating investment in the economy. Nothing about the stock market’s rise though fundamentally changes things for the middle class, poor and working class.

Indeed, Republicans seem intent to make things worse. Just yesterday Trump ordered an end to Obamacare subsidies for the working class. This will have the effect of pricing almost all of them out of the health insurance market. This will make healthcare more expensive, increase the probability of bankruptcy due to medical debt and make their financial situation more precarious. In short, they are likely to be pushed down the ladder again. The major reason these classes saw any gains recently was from having affordable health care, which helped protect their assets.

Having tasted real health insurance, these voters are likely to be furious when they vote next November, particularly as the rich will keep getting richer. While the stock market may continue to surge until then, these changes will directly affect the financial stability of the middle and lower classes. It’s likely that when these voters realize they have been shafted once again that Republicans will pay a huge political price.

Ted Cruz is worried about a blowout if Republicans don’t deliver on tax cuts and repealing Obamacare. As he will discover next November these are the factors likely to cause the blowout.

Stuck in Merrill Lynch beneficiary hell

The Thinker by Rodin

It sure is nice to inherit some money. Good luck in collecting it, at least at Merrill Lynch.

My father passed away on February 1. Some weeks afterward our stepmother told us we were beneficiaries to some of his accounts. It turned out to be a fair amount of money, considering there are eight of us, roughly $80,000 each. My sister spent a few weeks on the phone with M/L going in circles. Frustrated, she asked me to be the family’s liaison. She still has a job. I am retired.

Sure. Whatever. I’m used to playing the good brother role and I did have the time. And boy it sure takes time if you mean going around in pointless circles. They are clearly loath to let go of Dad’s accounts. In fact, it’s hard to imagine how they could make it any harder to claim money that is rightfully ours.

Over more than thirty years my father had a relationship with “Lee” at M/L, who apparently owns a brokerage under the M/L umbrella. Over the decades a lot of things have happened in this industry. For M/L, already a huge and impersonal company, it meant being acquired by the world’s largest and most uncaring bank: Bank of America. This is something I learned later on. Had I known, I would have taken it as an omen of what was to come.

It sounded pretty straightforward. Dad had about 28% of the funds he wanted to bequeath us in a simple account, a “Cash Management Account” to use the M/L term. The rest were in Roth accounts, which were tax advantaged. So you would think it would be pretty simple: sell any mutual funds in these accounts, divide the totals by eight and cut each of us a check for that amount.

Ha ha! Of course not! The first set of excuses I got when I made my initial queries was, “It’s tax season, we’ll talk to you after April 15.” They were so busy in the M/L office that they can’t be bothered to help us with this, at least not while they have clients that want to give them money rather than take it away. To say the least Molly, the lady I spoke with, was curt. Feeling a bit ticked off a few days later I dialed Lee.

Lee was all sunshine and light, expressed condolences and said this wasn’t that big of a deal. He’d have Molly send me the forms we needed. One ripple was that since the Roth funds were tax advantaged, we might want to set up inherited Roth IRA accounts. Or we could take the money as cash. In any event it’s an inheritance. No taxes to worry about.

So many of us dutifully decided to set up inherited Roth IRAs, a puzzling process to learn about and hard to set up as you need a death certificate. As for that Cash Management Account of Dad’s, my sister sent me the forms she had. They required notarization. It took some time since there are eight of us but we all found notaries. They sent the forms to me. I double checked them and mailed them in as a batch. Given their importance I sent them certified mail so they couldn’t claim they got lost in the mailroom.

A couple of weeks later after hearing nothing I inquired about them. Molly looked at the forms and said, oh, these aren’t the right ones! I pointed her to emails we had gotten saying they were the right ones. Oh, but that’s a Merrill Edge form (a subsidiary of BankAmerica.) They don’t accept that form because they are Merrill Lynch, not Merrill Edge. Somehow I managed to not raise my voice because it was no small matter of time and expense by eight of us to get all these forms signed, notarized and sent in. Okay, I said, what form do we send in then?

Well, there is no form, Molly replied. You write a letter listing the shares you are entitled to, get it notarized and send it in. Do you have a sample? Oh no, we don’t do that. You have to do it. How do we know it will be correct when we send it in? Well, underwriting will tell us if it’s okay. Oh boy, eight of us, all doing individual letters, with numerous back and forth letters, no guidance, until maybe we crank out one they would accept. And no one will get anything until all eight of us do it correctly. So this isn’t going to work. Well, it’s how we do things. After another chat with Lee he agreed as a “special exception” to give us a sample letter with an attached spreadsheet that listed shares and cash we were each entitled to. I guess they expect their clients to hire CPAs to do these things.

Some weeks passed during which Molly went on vacation. Eventually after dodging calls for a few days I got her on the phone. I learned they could not cash out the funds in the Cash Management Account. My father had requested an “equal division”. In their minds it meant we all had to get proportional shares of the mutual funds in the account. They couldn’t just mail us a check. We needed each to have a broker that would take these funds.

After much back and forth I learned that dividing these shares by eight of us meant there were fractional shares left over. Fractional shares could not be passed to us and would have to be sold. We all had to get whole shares. I figured they would want us to send notarized letters saying it was okay to do sell these fractional shares. Surprisingly they let me as my family’s spokesman authorize it. Of course, they could have volunteered this information weeks earlier, but did not. You have to persistently dig for it and if you ask the right question they will give you the right answer. They won’t volunteer anything. God forbid they give you a document that explains the whole process with a simple checklist to follow.

They suggested we all set up Merrill Edge Cash Management Accounts to make it easier to get the money. Of course this also has the advantage of keeping the money inside the Bank of America Empire. So I tasked my siblings to set these up. By this time of course they were spitting nails. The last thing they wanted was some sort of Merrill anything account. But it looked like it could save months or years of runaround, so I requested they each set one up anyhow. They had a contact in their office that was sometimes available who could set these up. Some siblings gave up in frustration when calls to this lady were not returned and called their local office or set one up online.

Molly said that their system wouldn’t show them our Merrill Edge account numbers unless their office set them up. I assumed she was going to complete the draft letters and put in the exact numbers of shares and our account numbers. When I asked, she said I was supposed to do it. Naturally this was news to me. I now have all these forms done and will mail them out to my siblings, who must get this second set notarized. Except only the letter must be notarized. The attached spreadsheet just has to be signed and dated.

I’m betting that when these all arrive at M/L they’ll find a reason to kick them back and we’ll have to start all over.

Then there are my Dad’s two Roth funds. Here to speed things up we were encouraged to cash them all in. My siblings were fine with this. I had researched the funds in these accounts and they were underperforming funds. Granted my father was chasing stability instead of market trends, but of the five funds I looked at three were real laggards compared with the S&P 500 index and all came with more than 1% annual management fees. Jeebus! Well, at least if we cashed them in we could hardly do worse than how they managed these funds!

But they wouldn’t sell the Roth funds until each of us called them personally and okayed it. That took some time. To “speed up” the process I was told to send drafts of the Roth withdrawal forms I got from my siblings so they could flag errors. I sent them electronically on May 20. There they sit, still waiting to be reviewed. Molly says their staff of four is down to 2 and she is so busy but she hopes to do it next week. Doubtless they will find errors that will have to be tediously corrected. But if I get them all corrected then I can send in this batch of forms and in theory there should be no issues so they can disburse the funds. I’m fully expecting I’ll send them in and they’ll find a reason to kick them back, something they haven’t explained before. We’ll see but it depends on poor overworked Molly actually deigning to review our forms.

In short, it’s a messed up and confusing process. In fact, it’s not a process at all. It seems they make it up as they go along. It seems likely that they are paid based on the assets in their accounts and they don’t want to lose them. Only with persistence, firmness and summoning your inner Donald Trump can you collect and I suspect we are nowhere close to getting our shares. They won’t volunteer anything. Meanwhile siblings who could use the money so it can grow for their retirement can’t get it. Not that M/L cares at all.

I have no idea if this sort of hassle is typical in the industry, but I can say to avoid M/L at all costs. If you have beneficiaries for accounts, ask to see their process for distributing funds and make it known to the beneficiaries. Make sure the process is straightforward. My Dad didn’t do this. The inheritance was a complete surprise. But being a beneficiary doesn’t mean much if you can’t actually get the money.

I am expecting before this is over we’ll be filing a lawsuit. It will probably go into the bottom of a long queue of similar lawsuits all from angry people like me simply trying to collect money intended for them.

Why to drive on the wrong side of the road, or the power of rebalancing

The Thinker by Rodin

Whew! It’s been a long week, which makes it hard to find time to blog. When I slow down the frequency of my posts, traffic to my site sinks as well. Well, sorry, I’ve been busy. It’s not that I have run out of ideas. I generally blog about whatever is on my mind on a particular day. It does help though to know your market.

This blog attempts to be part education, part inspiration and part entertainment. The education part of it is because I probably spend too much time reading disparate stuff and when I find some wheat in the chaff I feel an obligation to get it out. Inspiration happens less frequently as most of my really good ideas and insights came out years ago. (Fortunately, a lot of those posts still receive regular hits.) The entertainment part is to give visitors a reason to come back. Sex sells, even on my obscure blog, as evidenced by a disproportionate number of hits on my posts on stuff like Craigslist Casual Encounters. Apparently I am vain enough to care about these hits, hence I am more than happy to do a monthly post on Craigslist casual encounter weirdness, or harpoon a recently uncovered philandering politician. I just can’t write about it everyday.

Today money, not sex, is on my mind, mainly because my financial adviser and I have been buying and selling mutual funds. So this post can be classified as education. I keep learning stuff from him and I thought I’d share what I’ve learned about the power of rebalancing.

When I speak of rebalancing, I mean shuffling funds you own around. In the case of my wife and I, these are mostly retirement funds. You may have an IRA or a 401-K and you may have the power to move funds around from one kind to another, say from stocks to bonds. This may not apply to many of you because you don’t have any funds. But you may someday, in which case keep reading. And if you do have some funds, you may learn some new stuff.

So let me ask you. Suppose you had a hundred shares of Google, purchased for an average of $500 a share, and are now worth about $1000 a share. You’ve been watching it trend up regularly with few bumps down. Would you sell it?

Most investors would say, “Hell no!” It’s the human tendency to be greedy, of course. After all, it could go to $1500 a share. 200% return sounds a lot better than 100% return.

Rebalancing a portfolio though is all about selling funds that are making money and putting it into funds that are not. Is that crazy or what? It is crazy, but crazy like a fox, and it is the secret to acquiring wealth for us ordinary mortals not fortunate enough to be Warren Buffet. Of course, most ordinary people aren’t buying stocks. We are buying mostly mutual funds, which are combinations of stocks, bonds and securities, and it is being done somewhat abstractly, probably through our 401-K or IRA plans. We buy mutual funds to minimize risk. Yet the principle remains the same. If you have money invested in a hot mutual fund returning 30% a year, it sounds crazy to take profit from it and invest it in some underperforming fund category, say a CD fund. Why would any sane person do this?

It’s because the only thing that is certain in the world of finance is that nothing stays static. In reality, investing is like playing a game of whack a mole. One fund class/mole gets hit and another one will pop up to replace it. It’s as given a phenomenon as the seasons except when it will happen is unknown. It’s well known that over time that certain kinds of funds pay better than others. Stock funds, for example, generally return more money than bonds over thirty years, although their value may swing up and down a lot. Investors chase profit and they chase wealth retention. Moreover, there is a lot of a herd mentality, at least among professional investors. Many take their cues from channels like CNBC. For the most part these investors aren’t looking ten or thirty years out. They are looking tomorrow, next week or next month. They want to grab some profit now. Investors like you and me though are more likely to want to gain wealth in the long term. We can’t time the market. In truth, financial gurus can’t time the market either. They like to think they can. Anyhow, since we can’t time the market all we can really do to acquire wealth is to intelligently ride the dynamics of the market.

And since the only constant in investing is change, we have to ride change to acquire wealth. So if we have a fund that invests heavily in sexy tech stocks like Google, Microsoft and Apple that has had a good and steady return then we need to sell it when it is profitable. We probably don’t want to sell all of it. There are two parts to this wealth business: gathering more wealth and hanging on to the wealth we have. So typically we own a lot of various fund classes, accepting more risky investments when we are younger and less of these investments as we age. So we can and probably should hold on to that sexy mutual fund, just bleed off some of its profits and put it into something that is not so profitable. We obviously don’t want to invest the money in a class of funds known to be a loser, such as a junk bond fund, but one that is currently undervalued and should become profitable once market conditions change fundamentally. Recessions are not events that might happen, they will happen. When they will happen really cannot be predicted, but when they happen a whole lot of panicked investors will quickly sell their new unsexy assets and buy U.S. Treasury securities and various bonds. We saw this during the Great Recession.

Reinvesting is all about buying low and selling high. If you don’t sell those sexy funds when they are high and buy something undervalued with it, you won’t lock in your profit. And if you don’t lock in your profit, you defeat the whole purpose of investing. The purpose of investing for the average person is not to get rich quickly, it’s to be rich in the future and retain your wealth in the future so you can spend it the way you like.

So that’s what my financial adviser and I have been doing: carefully looking at the value of our portfolio, seeing where we made money and to the extent its value exceeds the percentage we want to be vested in it, putting the profits into well managed funds that haven’t done as well instead. Because when market fundamentals change, as they will, we will have bought those funds when they were undervalued and will be prepared to sell them at a profit, probably for those stock funds that will then be undervalued.

In principle this is quite simple, with the hard parts being picking well-managed, low-fee funds in each asset class. The other part requires patience and discipline: ignoring day-to-day fluctuations and rebalancing regularly.

So it turns out that being a financial wizard is not that hard. You just have to have patience and be a methodical, slow and steady type of investor. You also have to adopt a counterintuitive financial strategy. It’s like driving on the wrong side of the road. Except by not following the crowd, you will actually be on the right side of the road.



The Thinker by Rodin

I won’t claim to be an economist or financial wizard. I don’t bother to try to time the stock market. I buy in mutual funds in good times and bad times, hoping that general growth in mostly proven funds will mean I won’t eat dog food in retirement. So I was buying in March 2009 when stock indices reached their Great Recession bottom and I am still buying funds today, albeit steadily and incrementally.

That’s one way to make money in the stock market: keep buying in good times and bad and count on general growth for appreciation. That’s the boring and safe way to make money from the market, as long as you do it in the long term and keep plugging away. Hopefully you are not buying crappy stocks, funds and bonds, but ones with decent track records for beating the market.

The other way to make money is to follow the maxim: buy low and sell high. The smart people with capital were doing just this in March 2009. They were fearlessly investing while others were willing to part with their stocks for just about any screwy lowball price others were willing to bid. Oh my God, the world is going to hell. Gotta turn this stock into cash right now and maybe survive the next Great Depression. That was the wisdom of those times, just four years ago. People were chasing their fears and their fears told them to horde cash. As I noted in June 2009, stock in the bluest of blue chips, General Electric, briefly fell below $6 a share that month. GE, like many stocks, was crazily undervalued. Those with cash and nerve should have been telling their brokers to buy GE in bulk. If they had, and I wish I had enough spare cash to buy it, they would be sitting pretty right now. On March 5, 2009 you could buy GE common stock for $5.88 a share. Today four years later it closed at $23.67 a share. That’s an appreciation of 403% in just four years, or 100% appreciation per year, on average. It was, as I said then, a crazily great investment. Granted this is not as high as GE stock has ever gotten. On June 22, 2001 right before the tech sector collapsed GE traded at $51.86 a share. It was crazily overvalued then.

Most likely GE stock and the market in general are suffering now from irrational exuberance as well. Stock prices are inflated, largely because the Federal Reserve is keeping interest rates artificially low. While the Fed has no immediate plans to change this policy, you know it cannot last forever. In fact, some are speculating that even if the Fed continues to keep interest rates low, the market will correct this artificial imbalance through inflation. Inflation happens when too many dollars are chasing too few tangible assets. With nowhere else to put money in hopes that it will grow, people are buying stocks. This tells me that stock prices are inflated. But also I can sense they are inflated. I can tell from the anemic growth in our GDP, the 7.7 percent unemployment rate and median wages that continue to fall. While increasing stock and home prices will help stimulate growth, if it comes it will come much later, and it is likely to only help stocks reach their current valuation, not actually meet their current valuation.

March 2009 was, in retrospect, the time to buy and hold. Arguably, March 2013 is the time to sell and profit. Convert that valuation into cash, while other irrationally exuberant buyers are willing to buy your stock at inflated prices.

Of course if you followed the crowd and sold stocks and funds in 2009 and are buying them now again in 2013, you are guilty of two things. First, you are guilty of being like most everyone else: following the herd. There is some comfort perhaps in that you were not alone because your neighbors were doing the same thing, which is one reason their net worth (and likely yours too) fell. Second, you are being stupid a second time. You are the bottom fish that the bigger fish are about to consume. They are picking your pocket, not the one you have now, but the one you think you will retire on. You are buying what is likely to be overvalued stock in the long term. Why are you doing this? You are probably doing this because you cannot make a decent return for your cash by having them in savings and money market accounts. You are frustrated and you see the stock market surging up 26% in one year and you are thinking, “I deserve a piece of that action”.

And you do, but you are probably chasing an illusion. There is a stock market correction coming. I cannot tell you if it will be this month, this year or five years from now. But it’s not too hard to see that it is coming. Economic growth is anemic and profit depends on growth. Growth also depends on people having more money to spend. While the rich do, they are a tiny part of the populace. People like you and me are probably watching expenses like a hawk.

What do you do if you have been following the herd? My suggestion is to stop buying stock, most of which is dramatically overvalued at the moment, and put that money in a cash account for future investing. You are unlikely to get much appreciation for your investment, but you are likely to lose money buying stocks. Wait for the next market correction, when the stock indexes have lost a third or more of its value. Then steel your nerves and buy, probably in blue chip stocks. Then hold and sell many years later when the signs are clear the market is overvalued again. That’s when you lock in the profit.

If you did buy GE stock in bulk in March 2009, you are probably smart enough to do what you are already doing: selling it and converting it into cash for future buying opportunities. In general, if you have genuine appreciation for your stocks and bonds as a result of buying them low, now is the time to lock in your profit. Profit may also be found in selling your house. In most markets it is a seller’s market and prices have fully recovered from the Great Recession. If this is true in your area, your house is mostly equity, and you want to lock in that wealth, selling your house may make sense. (Of course there may be capital gains and other tax implications from doing this. Consult a financial adviser before doing this.)

Will I be doing any of this? No. As I mentioned, I don’t time the market. I invest regularly and I invest long term. If you are not this kind of investor though, look at your portfolio carefully and note those funds that now are valued significantly more than what you paid for them. Unless there are some special circumstances for these particular stocks and funds for future growth, now is the time to sell them and convert them to cash. Most likely you will find this to be a very profitable experience.

Wall Street’s puppet masters

The Thinker by Rodin

Last month I wrote how the oligarchy stays in charge. At the time, the Occupy Wall Street movement was nascent, so nascent that not even I was blogging about it. Since then it, everything has changed. It used to be that the headlines were full of stories about how we need to cut the deficit and lower taxes. Thanks to OWS, the story is now about the chronic lack of jobs, sinking standards of living that seem unstoppable, and a generation of mostly twenty somethings with no real job prospects on even their most distant horizons. They are joined by other large groups of unemployed people who happen to be over fifty, and thus become something like untouchables. Unemployment is a problem at all levels of the workforce. The OWS movement is finally giving it the focus it deserves, and rightly raises the question: why did we bail out Wall Street when none of it trickled down to the unemployed who needed it most?

The OWS movement has at least made me do more pondering about how the wealthy stay wealthy and how the rest of us take it on the chin. There are the obvious strategies that I mentioned in the previous post: the moneyed and Wall Street buy the influence they want. Then there are less obvious strategies: such as using inheritances to pass unearned income to the next generation, wealth that is arguably put to unproductive uses. Then there are the strategies that most people don’t think about.

For example, there is snuffing out potential competition. The oil companies, in spite of their profits, are running scared of the clean energy industry. Oh sure, they are spending lots of money with newspaper advertisements touting how they are going green by doing solar energy projects and the like. This is ninety percent setting expectations and one percent doing something tangible. It’s a try to set up a meme with the public that, “Well, they really aren’t entirely evil just because they want to rip up Alberta’s tar sands.” Those with the money, at least if they are savvy, will continue to spend significant capital to make sure competitive markets don’t emerge.

It’s not coincidence that the oil industry contributes disproportionately to Republican candidates, for instance. This behavior is not seen as anticompetitive; it is seen as pro-business. It’s easy to win the competition when you can use money to set an uneven playing field from the start. Thus money buys not just political power, but the ability to have your message drown out the competition’s. In many cases, you can buy out these threats with your ready capital, often ostensibly to build market share in an emerging industry, but more typically to quietly kill them so business as usual can continue.

This happens all the time here in American but we rarely notice it. Why are there only three major ratings firms on Wall Street? It is in part because the big three have the capital to squash any competition. The government rarely breaks up companies anymore, even after the Great Recession. In fact, despite the lessons of the Great Recession, the trend is just the opposite. Thus, as one example, Bank of America swallows up Countrywide Mortgage and everyone yawns. Money gives you this sort of power. Unless you have an administration and congress full of trustbusters, abuse simply leads to more abuse.

Perhaps the most insidious way to stay in charge is through financial obfuscation. A good example is derivative stocks. The more complex you make a financial instrument, the harder it is to figure out what is really going on. Only experts can really understand how these instruments work, and then only dimly. In all likelihood the only ones who really understand them are those who create and manage them.

That leaves us poor individual investors pretty much baffled. We know we need to invest money for the future but unless the financial entity is incredibly simple, like simple shares of a blue chip stock or an index fund, we are baffled by how it works or how to fairly value them. Instead we turn to so-called experts to give us advice on what represents good investments, for which usually they have a vested interest that disproportionately lines their pockets. To really understand our financial world, you need a PhD in finance plus you have to keep up on the minutia of markets. If you can do this, you can be bought off. Wall Street will hire you for seven or eight figure incomes to manage a fund. Unless you have missionary zeal, you won’t be an Elizabeth Warren trying to simplify things for the average consumer. And if you are Elizabeth Warren, you will find out that politicians have been bought off specifically to keep you out of a position of power.

Yes, obfuscation is profitable, at least for those already in charge, and it effectively drains wealth from the rest of us. We think that to make money we must do it through specially trained intercessors on Wall Street. What we really need are simplified rules and financial instruments that the average person can understand, which implies that many “innovative” financial instruments should probably be outlawed. As we have seen, many were engineered without real failsafes and have cascading effects when they fail that drain wealth principally from those who never directly invested in these instruments.

No wonder Republicans are dead set against a consumer protection agency. They realize that if such an agency were effective, it might level the playing field. And what that really means is that wealth generated through third parties and financial obfuscation might return to where it rightly belongs: to individual investors.

Not so smart on Wall Street

The Thinker by Rodin

I had a feeling that our cruise would occur during an auspicious time. A last minute debt deal at least assured me that I would not be on furlough when I returned home. On the day our cruise set sail for Bermuda, the stock market plunged over six hundred points, the sixth worst point fall on record. Since then the trend has been mostly down, with the Dow Jones Industrial Average down some four hundred points for the day as I write this (August 10, 2011). It feels a like 2008 all over again. Markets are especially nervous about national debts and obligations. The United States is hardly alone. Greece, Spain, France and Great Britain are among those countries that make their creditors nervous. The trigger this time was the downgrade of U.S. treasury bills by Standard and Poors, which last Friday cut our rating from AAA to AA+ status, the first downgrade in our history.

The market is desperately searching for safe harbors for capital, but is finding few of them. Our financial world is riskier than it was. Doubtless with these stock market declines my portfolio has been badly hit. Doubtless I lost my illusory millionaire status. I have no idea if we are plunging into a double dip recession or worse, but the tealeaves that our economy was having difficulty have not exactly been hard to read. Over the last few years, Wall Street has exhibited irrational enthusiasm and drove up stock prices to artificially high levels. It did this largely on hope, probably because recessions typically don’t last too long.

Wall Street obviously discounted the signs that this recovery, at least here in the United States, would be largely an illusion. Yet the signs were clear and unambiguous: an unemployment rate that would budge only grudgingly, a fearful middle class with no extra income, relatively high inflation and political intransigence that ensured that common sense would take a holiday. Standard and Poors finally acknowledged the obvious by lowering our bond rating. It did so not because our ability to pay bondholders was really in doubt, but because our country refuses to find a sensible financial path forward. With the debt ceiling deal, as usual, we pushed problems into the future and did not really fundamentally address any of them. We created a dubiously legal entity called a Super Congress which appears doomed to be dysfunctional. Everyone knows what would really calm the markets: some measure of tax increases to accompany expenditure reductions. This, of course, is exactly where Republicans in Congress will not go. While I am hopeful plunging markets may force Congress to exercise some common sense, it is mostly a fool’s hope. Perhaps the 2012 election will bring clarity, but if I were a betting person I would not bet on that either. So expect the stock market to remain in turmoil for some time.

I remain not too worried for myself as long as I have a decent job. I leave it to my financial advisor to keep me on a sound long-term financial strategy. But I can pretend to be scared like mostly everyone on CNBC, one of the few channels available to us here on the cruise ship. I once opined that capitalism is our true religion. Watching CNBC certainly reinforced this opinion. From watching CNBC, it is hard not to conclude that the financial class is largely a nattering bore, obsessed with the minutia of the moment and largely tuned out to the facts in front of them. There are only a few things that really matter about investing in a company, but you would never know it from listening to these CNBC talking heads. What matters is a company’s track record, how leveraged it is by debt, the opinions of their customers and their ability to innovate products that people want.

Look at the companies that are truly prospering, like Apple Computers. You know that money invested in Apple will probably return growth and dividends over the long run. I have no idea whether their share prices are overvalued or not, but I do know owning shares of Apple means your money is probably not invested down some rat hole. Whereas when you look at other companies, say Bank of America, whose balance sheet is rife with risky subprime mortgages, you can reasonably infer it’s a risky stock in the long term, because it was being managed by short-term profit-obsessed bozos in the mid 2000s when clearer heads were needed. I know I would need a lot of convincing to invest in Bank of America. Fool me twice, shame on me.

Instead, I simply refuse to become obsessed about short term trends in the stock market. To the talking heads on CNBC, that seems to be all that matters. In my opinion, short term investors are basically gamblers. I put no more faith in them than I would on some guy on a winning streak in a Las Vegas casino. Short term investing is a dangerous game. If you have the nerve for that sort of financial life, like many investors tuned into CNBC, go for it, but you are likely to end up losing a lot of money. Instead, us non-financial wizards can save ourselves a lot of angst by investing in companies with the attributes I mentioned above, holding on to them for the long term, balancing our portfolios yearly to meet our financial goals and cashing them in selectively during retirement. These short term market changes always disappear over the long term. The only short term decisions I would make would be to buy solid companies whose stock price is artificially discounted as a result of irrational and wholly short-term fears on Wall Street, but only if I had some spare cash. Presumably my other assets would remain solid for the long term, and I’d want to hold onto them.

I am not a stock analyst. However, I do know a fool’s errand when I see one. Despite the endless blather on CNBC, it’s obvious that even the wizards on Wall Street cannot accurately predict short term trends. In fact, no one can since by definition the future is always unknown. So if you are listening to CNBC analysts thinking they see things you don’t, disabuse yourself of the idea.  Instead, when judging the economy, judge it by the economy you see and experience, which is the one that matters.

The short term market is driven principally by fear and greed, which depend on each other. It’s like an endless game of tug of war and like a Las Vegas casino, the odds are stacked against you by default. Rumors that are widely believed can be as good as gold for a short while, even if they are wholly fallacious. All sorts of short term fools will follow analysts on CNBC and elsewhere and dump perfectly good stocks for potentially risky ones elsewhere. You are likely a better predictor of market trends than they are. After all, these wizards built up stock prices on the hope for a recovery that never really materialized. Once again they have been proven catastrophically incorrect. And yet the economy will truly recover in time. It always has. When it does you want your portfolio to be full of solid and meaningful assets.

Instead, I recommend that you do your best to tune out the daily stock market ups and downs and keep investing in the long term. If you are not someone who wants to waste your time getting into the minutia of stock market analysis like me, then get a trusted financial advisor with the long view who will allocate your investments into funds that are well managed and include companies that have the attributes I mentioned.

Who wants to be a millionaire?

The Thinker by Rodin

Not me, at least I never set out with the goal to be a millionaire. When I entered adulthood around 1978 with less than a thousand dollars in my savings account and $5000 or so in student debt, the idea of me being a millionaire someday seemed preposterous. The only millionaire I knew was a character on TV named Jed Clampett, and he had a mansion in Beverly Hills and a cement pond in the back. I kept my expectations more modest. Perhaps I could afford to go into hock for a townhouse, which my wife and I finally did at age twenty-nine. At the time I felt very much overextended, and I was. The first time I wrote a mortgage payment check, my hand actually shook. I had never written a check for that large an amount before and writing a check that big once a month was scary and sobering.

Today, on Good Friday of all days, I updated our accounts in Quicken and found that we had become millionaires. Quicken told me today that our net worth is $1,000,531.14. Approximately. I looked around. Nope, I wasn’t living in Beverly Hills. Nope, Texas Tea was not responsible for our amazing wealth. Nope, no cement pond in the backyard either, although after heavy rains we do get a transient pond, which occasionally will be inhabited by feathered friends. No BMW in our driveway. No butler to fetch my coat. No maid service either; I still clean our toilets. We do have a lawn service. Maybe in 2011 that is one clue you can use to judge if someone is a millionaire. In my case, it is because I am just lazy.

And I still pinch pennies, although not as hard as I used to. There was a time when I kept track of all my cash expenses in a little notebook because I had to make my GS-5 salary stretch to the next payday. Perhaps as a result toward the mid 1980s I started tracking income and expenses. Around 1990 bought a version of Quicken for an antiquated operating system called MS-DOS. Back then our net worth was about $20,000. Still, I had no expectation of someday being a millionaire. For much of the last twenty years I didn’t see how it could possibly happen. Life was just so darned expensive! There were all these massive payments, for the mortgage, for childcare, and to keep our house from falling apart. I needed loans to live my lifestyle, principally car loans, and later home improvement loans. How on earth did we become millionaires?

It is still something of a mystery so I went investigating. One major factor: stocks have recovered. In fact they recovered so well I suspect they are currently overvalued, so my millionaire status may not last too long. In addition, thanks to the recession and all our deficit spending, the dollar has declined precipitously. Which means that a million dollars today is probably the equivalent of $750,000 or so a few years ago, based on what we can actually buy with it. I doubt our purchasing power has gone up that much since the recession began.

We became millionaires principally by holding steady jobs and steadily advancing in our careers, which at least in my case finally got me to a comfortable salary. We did it by investing in us, specifically our educations (a graduate degree for me in 1999, and a bachelor’s degree for my wife the same year). When our income allowed, we saved as much as we could. It also came from living for a few more decades. If you do your best to consistently follow a sound financial strategy, your net worth tends to grow. Another likely factor: having just one child.

It is also true that we were either lucky or canny. I had no idea that when I moved to the Washington D.C. region in 1978 that it would be financially rewarding, at least compared to other places in the country. The high cost of living appalled me, but I had the good fortune to settle in Fairfax County, Virginia, a prosperous county full of beltway bandits and clean industries, mostly of the software kind. It is a place where good jobs were as fungible as money and never required the hassle and expense of moving. While I often groaned while making my house payments, my property values steadily appreciated over the years. Real estate as an investment rarely returns more than inflation, but our house, purchased for $191,000 in 1993 is worth $460,000 today. I expect it at least held its value. We were also lucky. We generally bought in buyers’ markets, getting good value for our money. We could have easily ended up underwater, like many homeowners today. We weren’t bright enough back then to time our real estate transactions to the market.

Building net worth takes tenacity and well-practiced self-denial. It often meant buying used cars when I lusted after new cars, and when buying new cars, buying practical cars like Toyotas and Hondas instead of Lexus and Mercedes Benz. It meant gritting my teeth and adding a couple of hundred dollars to my mortgage payment every month. It meant living somewhat below my income; our single-family house with a one-car garage is modest living. It meant avoiding shiny new toys like cell phones until they got dirt-cheap. My cell phone is currently a $10 model from Virgin Mobile. I still don’t own a smartphone. Since I am by a computer most of the day anyhow, paying $50-$100 a month for an iPhone or Android device seems a poor value.

I still constantly scan the market for real value. Consumer Reports recently recommended the Ooma Internet phone for those of us with landlines who are already paying for high speed internet. I guess we don’t need a landline but we are used to having one for its clarity and reliability, attributes I don’t associate with a cell phone. I currently spend $25-$35 a month for a landline, which includes modest long distance charges. With my Ooma, after paying $249.99 to buy it, I will spend less than $4 a month, all of it going for taxes. I can do all the local and long distance calling within the United States I want for free, forever. My effective cost for a landline will go from $30 a month to $5 a month. Free from my bundle with the cable company, I will now get to play a bidding war between Verizon and Cox for my high-speed Internet and HD TV service.

While we may be “millionaires”, most of our wealth is not easily touched. Our house remains theoretical wealth until we sell it and/or we own it free and clear. ($75,000 to go!) About half of our wealth is invested in retirement assets that we cannot touch without penalties. Perhaps that is why even though we are millionaires I still tread cautiously financially. The kind of wealth where you can rarely think about how much money you are spending still eludes us, and always will.

Random thoughts running around my brain

The Thinker by Rodin

My brain is too scattered these last few days to put out anything like a coherent essay. So instead you get little snippets of stuff leaching out of my brain.

  • Bill Clinton sure is looking old. Today’s Washington Post showed him at a campaign rally looking all grandfatherly. He should look grandfatherly because he is 64. Fortunately, for Bill, he is not yet a grandfather in fact as Chelsea only recently got married and last I checked she had no buns in her oven. Still, grandfatherly or not, I miss the guy. The 1990s was a great decade that seems unlikely to come again. Somehow, I know that despite his sleazy ways, if he could be our president again we’d be in much better shape. He knew how to get things done and he wasn’t afraid to bitch slap Republicans. Even Obama is not as suave and slick as Bill. Bill was the master, unlikely to ever be exceeded.
  • As much as I enjoy my Mac Mail email client, web-based GMail has gotten so good that I am going to 100% web-based GMail. I think email clients are obsolete. GMail’s only remaining problem is the latency inherent with the web, but they are AJAXifying everything as much as possible to make minimize any latency issues. The new features for GMail just keep coming and most are compelling. I am overwhelmed with political emails, mostly begging me for money. Since all attempts at unsubscribing seem futile, with GMail’s new Priority Inbox, it is easy to push these into a seldom-read folder. Email sanity at last. Thanks Google!
  • Oh, how I hate Facebook. I don’t hate it enough to leave it, because that would piss off my friends, but how I wish I had the nerve to do so. As with most things, Google seems on the right track toward building a better social network. I have been experimenting with Google Buzz, Google’s answer to social networking. I really like features like being able to share an item I find while surfing with Google Reader, its RSS and Atom newsreader. Their integration of social networking components, while nascent, is done with a light touch and makes so much more sense than Facebook’s. Rather than put things all on one web site, it distributes features in its various products and is promoting an open social network. For example, I like how Google’s chat feature is integrated into a sidebar on GMail. For this anxious parent with a daughter two hours away, seeing her online inside GMail at least lets me know she is alive. That’s what I need in a social network, not annoying waste of times notices like knowing how a friend is doing playing Farmville and that some vague friend of a friend likes some pointless website.
  • RepubliCorp buys democracy one race at a time. This parody site is both funny and, not to put too fine a point on it, true, particularly after the Supreme Court’s recent Citizens United decision. Priority Number One after the election should be a constitutional amendment outlawing corporate or organizational spending on elections. Since Republicans in Congress will block the amendment from coming up for a vote, most likely, such an amendment would have to come from the states. I doubt state legislatures would have a problem with such an amendment. What more proof do we need that we have a Congress bought and paid for by corporate interests when close to eighty percent of rank and file Republicans want Citizens United overturned, but their leadership won’t allow it? The U.S. Chamber of Commerce alone has spent at least $21 million dollars for ads for the midterm election, and haughtily refuses to tell us who gave it all this money.
  • Investing money is just too damned complicated. Why are we expected to have the education of a Wall Street financier in order to come out ahead in the market? No wonder Americans keep falling behind! Investing money feels increasingly like a Ponzi scheme to me, developed specifically to inflate the pocketbooks of Wall Street executives. Between the obfuscation, fees and thousands of funds to sift through it is hard to know what you are buying. Sometimes I feel like it is so much easier just to give up trying, put all my investment money in something like U.S. Treasury Bills and hope I am not living on dog food when I retire.
  • Voters who vote for Tea Party candidates are proof that no one ever went broke underestimating the stupidity of the American people. In less than two weeks time, unless polls are mistaken, Americans are about to elect a crowd of uncompromising rowdies openly hellbent on making the rich richer and further cutting benefits for people, like those voting for them. If you are planning to vote for any Tea Partier, please send me your name and address. I have some Florida swampland I want to sell you. You must be dumber than a box of rocks.
  • And speaking of Tea Party candidates, it is so hard to decide on any given day which Tea Party candidate is making the biggest fool of themselves. One of the few pleasures of this election is daily seeing who will win the contest for the most ignorant and shameless Tea Partier. The competition is tough. Will it be the mighty Sarah Palin, Christine O’Donnell, Rand Paul, Joe Miller, Sharron Angle or Ken Buck? They are taking hubris and ignorance to whole new undiscovered heights.
  • Why is it that before Obama was elected, Republicans were all for mandated health insurance because it emphasized personal responsibility? And now are all against it because it is socialism? Nothing says Republican like hypocrisy.

Real Life 101, Lesson 12: The Basics of Investing

The Thinker by Rodin

This is the twelfth in an indeterminate series of entries that provides my “real world” lessons to young adults. It is my conviction that these lessons are rarely taught either at home or in the schools. For those who did not get them growing up you can get them from me for free. This is part of my way of giving back to the universe on the occasion of my 50th birthday.

Way back in Lesson 2, I covered the fundamentals of personal finance. I hope you used the intervening two and a half years to make yourself financially solvent. Good news: if you are not carrying a credit card debt, you are doing better than many Americans. Your net worth may hardly be in the positive numbers but at least it is positive. Even if you have student loans, providing it has helped you get a decent paying job, this is good debt.

You may be young but you might also have the feeling that old age is going to visit you someday. When it arrives, you know you would not prefer living in a cardboard box under a freeway. You know that to avoid this fate you need to start investing money now, although you might not have a whole lot to invest except for the spare change inside your sofa. Most likely you kind of resent having to save anything at all, but you know that like taking vitamins its one of these things that prudent people do. Where to start? Buy a share of Wal-Mart stock? Open a money market account? Buy gold on the assumption that its value will stay steady during inflationary times? There are an infinite number of choices and it’s so darn confusing!

I can make it easy for you: start with your employer’s 401-K plan. Why? Start there because if your employer offers a 401-K plan they will often match your contributions up to a certain percent of your salary. In other words, it’s free money. It’s true that except in cases of dire emergencies you cannot take out the money before retirement, but you still get to invest more money than you can contribute. In short, you should contribute as much money as you possibly can into your 401-K or similar plan, particularly if you get matching contributions.

Start contributing today and never, ever stop until you are fully retired. This is the golden rule of investing: start early and contribute regularly. Do not contribute a fixed dollar amount. Contribute a percentage of your income automatically with every paycheck. Your income should naturally rise as you age so at the very least you want your contributions to rise proportionately. It is never to late to start investing but the multiplicative factor for starting early is mind-boggling. Starting early means that you have more time to invest and your money has more time to grow. Give until it hurts. Give until the financial pain is just short of excruciating. As your income goes up, try your best to put a greater percentage of your income into retirement funds as well. There is an additional piece of good news: the IRS pretends your salary is your actual salary less your 401-K contributions. In other words, you end up paying less in taxes because you “earn” less. The net effect is you have a little more money available to put into your 401-K than if the money was taxed up front.

If your employer does not offer a 401-K, or even if they do, you can still open an Individual Retirement Account (IRA). In 2009, you can contribute up to $4000 and write it off your taxes, at least if you place your money into a “traditional” IRA. You can also choose a Roth IRA. The difference with a Roth IRA is your contribution is not subtracted from your income for tax purposes: you pay the tax upfront but can withdraw it later tax-free. With a traditional IRA, you pay the taxes on the income much later when you retire for the privilege of paying fewer taxes now. If you can swing it, because younger people tend to earn a lot less than older workers, the Roth IRA is the better deal. As you age you might want to open a Traditional IRA because then you are likely to be taxed at a higher rate than you will as a retiree.

The general guidance for investing is tried and true and fairly well known. In the very long term, invest in stocks or stock funds as history shows that overall they will provide higher returns. In the medium term, buy bonds. In the short term, stick with savings, checking and money market accounts for their liquidity and safety.

What else should you save for? Many smart young people find plenty of incentive to save for their own digs. They would prefer being tied down by a mortgage instead of renting a U-Haul every few years and moving all their possessions. They also have expectations that if they own property, it will appreciate, and their net worth will grow. (The mortgage interest deduction is also a nice tax break, although you may find the cost of maintaining your home can eat up the tax break.) Obviously, you don’t invest this sort of money into retirement accounts. Where to put it depends on how long you think it will take you to buy some property. Most likely, you don’t want to put it into some sort of stock-oriented mutual fund because there is likely to be too much volatility in the stock by the time you need the money. The safest bets are savings and money market accounts, but they produce almost no interest. A good choice looking several years out would be a well-rated corporate bond fund. Also consider a fund that buys Ginnie Mae bonds. Ginnie Mae bonds actually help homebuyers like you buy houses. There is risk of losing money, but it is very small, along with decent potential of above average market returns.

Okay, you are thinking. Where do I buy these sorts of funds? In addition, which ones are good and which are bad? Unfortunately, there is a lot of smoke and mirrors among investment firms and brokerage houses, which they gleefully help create. Real return is hard to figure out, given that returns are rarely guaranteed and many funds charge fees to buy and sell funds. Many funds come with certain minimums and contribution requirements. Billions are spent to shape your perception that firms like Vanguard and T. Rowe Price are smart places to put your money. You would be right to be skeptical.

If you want, you can be your own broker. You can in theory send a check to places like Ginnie Mae or the U.S. Treasury and they will send you bond certificates back. This is too much hassle for most people. When in doubt I go to the most trusted and unbiased source I know: Consumer Reports. I think any smart consumer should subscribe to the magazine, but you can also spend a little money to get access to their online web site. Periodically they rate various categories of mutual funds. Their ratings are not necessarily sure things, but they are good, unbiased bets.

Ultimately what you need is a personal financial advisor. Most likely, that will have to wait until you have enough income to also afford a financial advisor. Banks and brokerage firms will want to sell you their financial advice. Be wary because most likely they put their bottom line ahead of yours. When I finally had enough money to get a personal financial advisor and I chose someone local who was listed on the National Association of Personal Financial Advisors web site. My personal financial advisor makes recommendations to me. I do the actual paperwork to make them happen. He never gets a cut of my earnings, only a flat fee for sound and unbiased advice.

Until that time comes, it is probably a sound strategy to be your own financial advisor. You can supplement your knowledge not just by reading my advice but also by reading some of the many popular books on investing available at your local bookstore. By following the established investing rules I outlined, you are likely to do nearly as well as the financially sophisticated anyhow. The truth is there is always risk in investment, as well as rewards, and no financial guru is always right, not even Warren Buffett. Some approaches will prove to be luckier than others in the short term, but time seems to even out the playing field. Sticking to traditional rules should serve you well until you have the time and money to get your own personal financial advisor.