The S&P 500 Index TR was down 11.83% for the second quarter of 2010. The quarter’s performance turned the index’s performance negative for the year, which you can see in the above graphic.
Archives For June 2010
I came back from vacation to find a copy of Jason Kelly‘s Financially Stupid People Are Everywhere: Don’t Be One Of Them* waiting in my stack of mail. I opened it and started reading. I liked what I read. In fact, one part of his book inspired this post.
The book opens with a frank discussion of how the U.S. got into the financial mess of the last few years. His thoughts were similar to what you’ve read here over the last few years. There was plenty of blame to go around but that the bottom line rested with financially stupid people making bad choices.
From the introduction, Kelly moves on to discuss The First Rule of Finance, which is:
Never spend more than 80% of your take home pay.
I asked Kelly whether or not the 20% saved included 401(k) contributions. This was his reply:
On the 20% I suggest saving as part of the First Rule of Finance, a person could technically meet it by putting some of their money into a retirement plan and considering that as part of their 20%. The whole point of the rule, though, is to avoid debt and I don’t think retirement money helps people do that through most of their lives. Nobody relies on their 401(k) for normal living expenses.
That’s why I say to spend no more than 80% of take-home pay. Then, a person sets aside 20% of their take in a way that can be used for normal living expenses. That money can be used for big purchases or investments or whatever. That they’re also putting more away in a retirement account is so much the better.
Is it aggressive? Yes, and it should be. I’ve found that most people, once they adjust to a different income level, get used to it. They stop missing the % they socked away.
Being able to save 20% of your take home pay requires some self-discipline and might not seem feasible with other financial responsibilities that most people have like credit card payments and car notes. That’s where “The Three Cs” discussed in Chapter 2 enter the picture, “The Three Cs” are:
• Credit cards: NEVER carry a balance
• Cars: Don’t finance. Pay cash for your vehicles
• Castles: Put at least 20 percent down on your house, and keep the mortgage payment below 40 percent of your take-home pay.
Chapters 3 through 6 move into politics by showing how corporations control the type of government we receive (he doesn’t have much good to say about Goldman Sachs). Although Kelly is quick to spread the blame among both parties, he left out two important players in this politics game: lawyers and unions. Kelly focused almost entirely on the role that corporations play in politics via lobbying and campaign contributions. This is unfortunate because there’s no denying that lawyers have played a significant role in driving up the cost of health care and that unions asked for special exceptions during the health care debate. Also, in his discussion of health care, he makes it seem like some form of national health care is the answer to our problems. That a government-run system would somehow be cheaper.
In his discussion of oil, he stresses the benefits of electric vehicles but fails to discuss the costs involved in running them (electricity isn’t free) and the stress that charging such vehicles could put on the power grid.
Despite what I consider short-comings in his discussion of politics, I did understand his message that…
NOBODY (not government, politicians, or corporations) cares about your wellbeing but YOU!
The sooner we realize this and take control of our own finances, the better off we are.
Overall, a good book. It’s easy-to-read and I do thinkdespite the politicsthat people would benefit from this book.
I was updating one of my investment Excel Spreadsheets. I needed to add a refreshable stock quote, so I went to the research pane, typed in my symbol and it tells me that it’s not available. Upon further research, it turns out that the add-in has expired and Microsoft is no longer going to support the add-in.
What the hell?!?
This feature, which you can read about here, was one of the most useful features of Excel. I found a thread on one of Microsoft forums about the missing add-in. Someone from Microsoft curtly responded:
“The link has been removed as the addin has expired, There will be no more uploads for this addin on Microsoft.com”
I hope Microsoft reconsiders this because it was one of the most helpful tools of their program.
My cousin sent this to me in an email and I had to share it (I don’t know where the pictures originated):
I don’t know if you’ve been keeping up with the situation down in Venezuela or not, but it’s really interesting. We have witnessed Hugo Chavez nationalize various industries over the last few years. Most of this was started back when oil prices were high and could support Chavez’s ambitions.
Fast forward to today…
Now Venezuela is faced with both a recession on rampant inflation. Why? This article in today’s WSJ explains why:
Economists say Mr. Chávez’s populist economic policies are at the root of the problems, and that his attempted solutions are only likely to make matters worse, lengthening a painful recession that began last year.
“Venezuela’s economy is becoming so inefficient that it is having a harder time growing even with higher oil prices,” says Tamara Herrera, an economist at Global Source Partners, a Venezuelan economic forecasting group.
At the root of the current trouble was a huge run-up in public spending under Mr. Chávez’s government during the past few years on the back of high oil prices. To try to limit the resulting inflation, the president’s team resorted to price controls, which led to shortages and other problems.
One of the prices the government has tried to set is the exchange rate. But the system has grown in complexity, with effectively four different exchange rates, three set by the government and one set by the market—the black market.
I swear I could have read those paragraphs in Thomas Sowell’s Basic Economics 3rd Ed: A Common Sense Guide to the Economy*.
So why would Chavez pursue such a strategy as socialism? He claims it’s to help the poor but I think his motivation is much more sinister: total control. Chavez isn’t living with the mistakes of socialism. If he were living like the typical Venezuelan, he might have a different take on his policies.
Regardless, Venezuela deserves its own chapter in future economics books.
I had a review copy of Jason Kelly’s newest book, Financially Stupid People Are Everywhere: Don’t Be One Of Them*, waiting for me when I returned home from my family vacation. I’m not finished with the book yet so I’m not ready to post a review. However, I do want to share with you a quote from the book that resonated with me because it sounds like something I and other AFM readers said when we were discussing the housing bubble. Here’s the quote:
In all the talk of the economic meltdown, the media blamed the Federal Reserve for putting too much money on the street, blamed mortgage brokers for lending it out at easy terms, blamed banks for going along with the loans that came in from the brokers, blamed financiers for inventing ways to repackage and resell those loans, blamed homebuilders for building more houses than the market coud support, blamed housing prices for falling instead of rising forever, and blamed corporations for laying people off when the economy stalled.
Nobody blamed the borrowers.
Maybe “nobody blamed the borrowers” is an exaggeration, but he does have a point. Government (Republicans and Democrats alike) for sure placed the blame on everyone and everything EXCEPT the borrowers, who were largely “victims” of the whole mess. The reason for this is political. It’s not good politics to call voters stupideven though it seems most Americans did indeed consider most of those who got into trouble as stupid or at least ignorant.
The point of Kelly’s book is that companies have ALWAYS sought ways to separate people from their money. People would be wise to understand this and consider it in ANY business transaction. In other words…BUYER BEWARE! If all Americans understood this and it was backed up by NO BAILOUTS, it would drastically change the way people thought about their finances.
In other words, the real key to solving our problems is through EDUCATION! Unfortunately, it requires that people actually be proactive in seeking this education. Regardless, our system should be based on allowing those who take the initiative to succeed and those who don’t, to pay the price for their mistakes. It shouldn’t be up to government to try to cover all the bases by over regulating society.
“No one will know until this is actually in place how it works.”
That was Senator Chris Dodd on the financial overhaul that passed the Senate early this morning. You can read about it here. Here’s to hoping that something significant occurs from this legislation to bite Mr. Dodd in the butt!