Archives For September 2008

I want to highlight this comment I received regarding why young people aren’t saving money (edited slightly):

I’m 27 and I can tell you really simply why we are not investing.

1. Since the day we graduated we’ve seen nothing but bad news. Huge tech crash, current crash. We’re not even back to where we were almost 10 years ago.

2. We have huge student loans to pay back.

3. Finally got out of college in 2004, saved as much as possible and am currently underwater…may as well have spent that extra money.

4. There are no solid investment vehicles that are even matching inflation right now.

5. We want to start families soon and need short-term funds, not long-term retirement funds.

6. We don’t really have much trust in our country. Frankly, I don’t think the US is really #1 anymore and our economy will only decline in the long run unless we are willing to tackle education’s inadequacies, stop giving money for oil to countries that hate us, and truly address the issue of consumerism.

We don’t see the market as a stable investment for the near future and would rather sit on cash and then get in either in the US once we balance out or elsewhere if my dollars are still worth anything.

I know firsthand how hard it is to get on your feet after you graduate from college and are just starting out in life. It is tough to think about retirement planning when you’re barely making ends meet. That said, most of those reasons are really nothing but excuses. Let’s look at each one:

1. Since the day we graduated we’ve seen nothing but bad news. Huge tech crash, current crash. We’re not even back to where we were almost 10 years ago.

Tell me one generation that didn’t experience bad news. Bad news is part of life. We go through tough times all the time. It’s nothing new. Use those tough times as buying opportunities since asset prices are typically lower during the bad times than they are during the good times.

2. We have huge student loans to pay back.

Figure out how much you owe and map out a plan to pay them back.

3. Finally got out of college in 2004, saved as much as possible and am currently underwater…may as well have spent that extra money.

Please don’t think this way. Instead, think about it this way: spending that extra money would have only put you further into the hole. It took my wife and I several years to get above water.

4. There are no solid investment vehicles that are even matching inflation right now.

Investments fall in and out of favor. Stocks are suffering right now. However, over the long run, stocks are superior inflation-beaters. Don’t base your long-term projections on short-term performance.

5. We want to start families soon and need short-term funds, not long-term retirement funds.

With proper planning you can have both. It’s extremely important to take advantage of the one thing you have on your side: TIME! Start out by putting a 3-6% of your salary into your 401(k). Once you get used to it, you won’t miss the money.

Saving for retirement when you’re trying to start a family will require some sacrifice. But, it is well worth it. The absolute BEST thing my wife and I did was to start putting money into her 401(k).

6. We don’t really have much trust in our country.

What? The greatest country in the world? Sure, we have problems but this is still a great place to live. Even if you don’t trust our country, what else are you going to do? Go live somewhere else?

Bottom line: it takes patience and sacrifice to get ahead.

I appreciate this reader’s honesty even if I don’t necessarily agree with them.

This comes to us from Hillary Clinton’s editorial, Let’s Keep People in Their Homes, that was in today’s Wall Street Journal:

…we must address the skyrocketing rates of mortgage defaults and foreclosures that have buffeted the economy and ignited the credit crisis. Two million homeowners carry mortgages worth more than their homes. They hold $3 trillion in mortgage debt. Nearly three million adjustable-rate mortgages are scheduled for a rate increase in the next two years. Another wave of foreclosures looms.

I’ve proposed a new Home Owners’ Loan Corporation (HOLC), to launch a national effort to help homeowners refinance their mortgages. The original HOLC, launched in 1933, bought mortgages from failed banks and modified the terms so families could make affordable payments while keeping their homes. The original HOLC returned a profit to the Treasury and saved one million homes. We can save roughly three times that many today. We should also put in place a temporary moratorium on foreclosures and freeze rate hikes in adjustable-rate mortgages. We’ve got to stem the tide of failing mortgages and give the markets time to recover.

This is why the bailout for the banks, brokerages, and mortgage firms bugs me so much: it fuels the argument that we need to help people afford the unaffordable since we helped Wall Street. I am against a bailout of any kind—damn the consequences. There is no reason to believe that these companies will change their ways just as there is no reason to believe that these homeowners (a really bad term since they don’t really own anything) won’t again run into trouble. What then? Do we come to the rescue with another dose of help?

The solution to all this is really simple: we need to return to responsibilty and standards for both companies and citizens.

From today’s Wall Street Journal:

The idea of saving for retirement always terrified Zack Teibloom. With the stock market’s big drop this year, it seems even more daunting.

“I don’t even have one K, let alone 401 Ks,” says the 23-year-old Mr. Teibloom, a recent college grad who works as an editor for a small magazine in Chicago. “I’m worried that if I put money away, it won’t even be safe the way the markets are going.”

The saving and investing habits of young workers have long been dismal. Only 49% of eligible workers in their 20s participate in 401(k) plans offered through their employers, according to a 2007 study from Hewitt Associates Inc., a Lincolnshire, Ill., consulting firm. And less than 20% of this group is saving anything at all for retirement.

Source: WSJ – Market Turmoil Frightens Off Young Investors ($)

Isn’t it crazy how we do the exact opposite of what we should be doing? If the stock market was going up, up, UP, people would be jumping in left and right—essentially buying over-priced stocks. Now that the market is on a downswing, people are sitting on the sidelines. The very next paragraph of the article even mentions this:

Declining stock prices actually favor young investors, because it means the shares they buy have more room to grow in the decades before they hit retirement. But anecdotal evidence suggests the rocky stock market is scaring off many young people.

My advice:

1. Remember this quote from Sam Stovall, chief investment strategist at Standard & Poor’s:

“Since 1950 we have had 48 pullbacks – meaning declines of 5 – 10%. We’ve had 18 corrections – meaning 10- 20%, and 8 bear markets. At the worst on average we end up getting back to normal in about 3 1/2 years. But people just don’t want to wait that long and they let fear overtake their emotions.”

2. Take a look at these posts from my archives:

Why the Long-Run is so Important When Investing in Stocks

S&P 500 Rolling-Period Total Real Returns

3. Read Jeremy Siegel’s Stocks for the Long Run*.

4. Finally, if you’re young enough, tell yourself this: “I’m young. I have 30 years until retirement. I’m diversified. Why do I care what the market is doing today? The stock funds I’m buying today are on sale and I’m getting a good deal if I keep them for the long-run.”

Sitting on the sidelines isn’t a good option.

* Affiliate Link

Wow! It looks like the car business is changing. According to the DrudgeReport, Bill Heard, one of the nation’s largest car dealers, is shutting its doors. I’m familiar with Bill Heard because they have a couple of stores in Houston and were my prospects back when I was selling a plan to dealerships. I’m sad to see them have to shut down.

This clearly can’t be good for General Motors. I have a feeling this is only the beginning.

I was watching the news after the evacuation for Gustav. They did a story on the evacuation and how hard it was on people. They took a news crew out to interview various people and they asked them if they thought the government should reimburse people for the cost of evacuating. Astoundingly, most people said yes!

Do people realize that when we talk about the government, we are really talking about our fellow taxpayers? Is it really fair for us to ask our fellow taxpayers to pay for the cost of our evacuation?

We already have a system in place to help those who can’t afford to evacuate so I hardly see the need to reimburse everyone else. If you don’t like evacuating, then I’d suggest moving away from the coast.

I fear for the future of this country as it seems we are just becoming a nation of beggers (individuals and corporations). It’s really getting embarrassing.

So, what are your thoughts? Should we reimburse people for the cost of evacuating?

Going home tomorrow! Whoooo Hooooo!

We came back from Kansas yesterday but are still staying with my wife’s sister’s family. I drove to our hometown today to check things out. Overall the damage was not too bad in our town, which is good for us. We still had a tree that suffered major damage and will probably have to be cut down. At the time I was there, we had no power but there were trucks and crews in the area so I knew it was just a matter of time.

Anyway, I just found out a couple of minutes ago that we finally have power. I don’t know about cable, internet and phone but I guess I’ll find out tomorrow.

I’m ready to get life back to normal…

The title of this CNNMoney article Be Ticked Off – But Get Over It sums up the author’s opinion quite nicely: that the bailout of the financial services industry is infuriating but necessary.

I’m a “small government” kind of gal myself, one who is generally for lower regulation, lower taxes, and higher citizen responsibility – which would include allowing companies and individuals to experience the consequences and the rewards of their investing decisions. I simply can’t get behind the idea of bailing out those who fail and putting higher taxes those who succeed. That Americans are incented to take risks and are free to succeed (or fail) is one of the greatest things about this country.

But I also know it’s not that simple. Obviously some regulation is good and necessary, as are some taxes. And so are some bailouts, as much as I might wish otherwise.

Without this bailout, many experts are asserting that millions of people could lose their jobs (there are over 8 million employed in the financial services industry alone) and the credit crunch would likely become a credit freeze – which would collapse many unrelated businesses and even industries which rely on a constant flow of credit in addition to making it near impossible for even responsible citizens to get a mortgage or a loan.

In short, letting financial services companies fail would probably cause a sharp and potentially long recession which would arguably cost taxpayers a whole lot more than the proposed bailouts.

“This was done not to prop up shareholders and executives but to ensure the solvency of the financial system,” said John Norris, an economist and managing director with Oakworth Capital, a private bank based in Birmingham, Ala. I remember enough from my “Money and Capital Markets” class in college to know that people (citizens and foreign investors alike) losing confidence in our financial system is pretty much the worst thing that can happen. That’s why we have such complex and amazing systems in place to make sure that, for instance, ATMs and banks never run out of money.

All this scary information doesn’t make what’s happening right now in congress OK – but it makes it seem more favorable than the alternative.

The main thing that is making me uncomfortable is that I (and probably you) can’t critically evaluate what might happen if we don’t do a bailout. I personally have no idea how bad it might get and, therefore, whether a bailout is really necessary. I feel I am totally at the mercy of all the alleged “experts” who are fighting (read: lobbying) for this action – but don’t many of them work in or benefit directly from the strength of the financial sector? How unbiased or reliable are their opinions? Are we all just running scared and overreacting?

Feel free to share your own views or insights on this matter.

More from Meg at The World of Wealth