Archives For November 2008

Here is a quick look at the yeart-to-date total returns (includes dividends) for the ten sectors that make up the Dow Jones Total Market Index. As you can see, 2008 has not been kind!

I’ll update the Israelsen Portfolio next.

A Way You Can Help!

November 30, 2008

Here’s a worthwhile program you can donate to:

According to their website, the Shoes for Orphan Souls has given away 1.6 million pairs of shoes to orphan children here in the United States and throughout the world. That’s great but there are 143 million orphans in the world! The need is still great. You can either donate a new pair of shoes (or more if you so desire) to the program or donate cash to help with shipping expenses.

I learned about this program through my church.

I read an interesting and – shockingly – unique piece of financial advice the other day which I’ve been turning over in my mind ever since.

The advice was embedded in a very typical personal finance article on retirement under USA Today’s “21st Century Retirement” collection. The title of the article is How should you invest in a bad economy? Stocks? Bonds?

You can imagine the predictable advice this (nevertheless valuable) article spelled out; the experts suggested what financial moves people should make now, based on their ages.

Here’s the interesting part, outlined under the “If you’re in your 20s …” section:

One mistake young investors make is confusing the principle of investing aggressively with making risky investments, says Sheryl Garrett, founder of the Garrett Planning Network, a network of advisers who charge by the hour. In your 20s, you should be putting at least 80% in stocks.

But ignore the advice that you should make your riskiest investments when you’re young. You have lots of time — which means you can invest in a conservative stock fund, accept a lower return, and still reach your goals without worrying about catastrophic losses. “There’s no need to be in tech stocks or emerging markets,” Garrett says. “You can find great opportunities in stodgy old-fashioned blue-chip stocks.”

(emphasis mine)

This has actually never crossed my mind, I’m sort of embarassed to say. But it’s remarkably true and sensible. I don’t need risky alternative investments – nor do I need to pay more for funds which offer them – because of all the years I have until retirement. This seems counter-intuitive since you always hear that investors should be more conservative the older they are.

That’s true, but there’s a window. Very young investors can afford to be conservative because compound interest and time will account for most of the gains – we don’t need the to take the risk that comes with the possibility of an extra percentage point or two of return. Older folks need to be conservative because they have to make what they have last – they don’t have time to earn it back if they make risky investments and hit a long losing streak.

The middle group, those starting in their late 30s or 40s or even 50s, are the group who might most reasonably choose riskier investments – because they might really need the possibility of that extra percentage point or two of returns.

This seriously might change my asset allocation forevermore. I am currently a pretty risky investor. My retirement portfolio is 95% stocks, almost half of which are international, almost half of which are emerging markets. I’ve also got a fair dose of small caps and REITs. Basically everything including the kitchen sink. But – duh! – because I’m in my 20s I can, and perhaps should, be less aggressive with my investments and still reach my goals.

And isn’t that the objective – to acheive our goals while taking as little risk as possible? After all, if you won the lottery and were set for life, wouldn’t you just park at least most of that money in cash and bonds? You wouldn’t need to risk it by investing in stocks and other riskier investments.

More from Meg at The World of Wealth

The Houston Chronicle has been running a series called GoodFellows, in which they profile a family in financial straits that can’t afford Christmas.

The stories are both sad and maddening. They are sad because these families need help and maddening because so many men fail to take responsibility for their actions. For instance, one family profiled is a single mom with six kids. SIX KIDS! Her husband left the family after Hurricane Katrina and he’s not paying child support! My wife and I make decent money and we would have a hard time affording six kids. According to the article, this lady works two jobs and brings home $1,000 per month.

The purpose of these GoodFellows profiles is to help these families give their kids Christmas gifts. That’s all fine and good, but these families have needs way beyond Christmas. So, this brings to mind a question:

What’s the best way to help families in need? I mean REALLY help them!

Somehow I don’t think giving them money will help. I think they need more than just money. I think they need to learn to provide for themselves and to learn the art of good decision-making. I’m all for education assistance for those who really want to improve themselves. I would also go for some sort of temporary housing assistance for those enrolled in some kind of college or career training.

This lady is at least going to try to go to nursing school. I think that’s great.

What are your thoughts?

Robert Rubin Disappoints Me

November 29, 2008

A front-page article in today’s Wall Street Journal talked about Robert Rubin’s role ($) during the Citigroup turmoil. From the article:

Mr. Rubin said it is a company’s risk-management executives who are responsible for avoiding problems like the ones Citigroup faces. “The board can’t run the risk book of a company,” he said. “The board as a whole is not going to have a granular knowledge” of operations.

Still, Mr. Rubin was deeply involved in a decision in late 2004 and early 2005 to take on more risk to boost flagging profit growth, according to people familiar with the discussions. They say he would comment that Citigroup’s competitors were taking more risks, leading to higher profits. Colleagues deferred to him, as the only board member with experience as a trader or risk manager. “I knew what a CDO was,” Mr. Rubin said, referring to collateralized debt obligations, instruments tied to mortgages and other debt that led to many of Citigroup’s losses.

Mr. Rubin said the decision to increase risk followed a presentation to the board by a consultant who said the bank had committed less of the capital on its balance sheet, on a risk-adjusted basis, than competitors. “It gave room to do more, assuming you’re doing intelligent risk-reward decisions,” Mr. Rubin said. He said success would have been based on having “the right people, the right oversight, the right technology.”

The decision has been blamed in part for Citigroup’s problems, including the growth of its CDO holdings amid signs the mortgage market was unraveling. Mr. Rubin doubts that’s true. “It was not an inflection point,” he said, but “I just don’t know what would have happened” if the decision had been different.

I’d like to hear an executive say, “You know what, we messed up! We packaged crappy mortgages together and sold them as safe investments. For some reason we forgot that you can’t grant mortgages to people with poor credit and little ability to pay them back and expect good things to happen. We messed up bad!”

Instead, we get guys like Rubin saying stuff like, “I just don’t know what would have happened had we done things differently.” What the heck?

This is the real kicker (emphasis mine):

Mr. Rubin said he believed in 2004 and ’05 that while a cyclical downturn such as the 1994 Mexican devaluation or 1997 Asian financial crisis was possible, the losses the bank might suffer wouldn’t come close to wiping out the profits made during the good times.

In the current crisis, “what came together was not only a cyclical undervaluing of risk [but also] a housing bubble, and triple-A ratings were misguided,” he said. “There was virtually nobody who saw that low-probability event as a possibility.”

Maybe Mr. Rubin should go back to stats class and learn the definition of “low-probability.” When you bundle together lots of subprime mortgages, there’s a high probability that they will default. That’s why they are called “subprime mortgages.” I just don’t see how someone with Mr. Rubin’s intelligence can say something like this.

This is just another case where greed trumped “doing the right thing.” And now we have all these executives saying stuff like, “I don’t know what we could have done differently?” Yeah, right…

This is why I don’t go out on the Friday after Thanksgiving:

Wal-Mart Worker Dies After Crowd Rushes Store

It’s just not worth it to save a few bucks. I say this as my wife and mother-in-law are out shopping at this very moment!

Happy Thanksgiving

November 27, 2008

I just wanted to wish everyone a Happy Thanksgiving. Enjoy the day!