In the midst of the current sluggish economy that has engulfed the government and business sectors in an avalanche of difficulty and uncertainty, there is a great temptation to ‘curse the darkness’ by casting blame.  It is certainly true that the current financial situation has plenty of blame to go around.  Typically, entities such as “Wall Street Greed” and “Irresponsible Government” are dogs that frequently get kicked.  However, there is a very large elephant that frequently seems to be overlooked.  That elephant is personal responsibility.

The reason why personal responsibility plays such an important role in the current economic situation is because it is impossible for a financial crisis to develop unless there are a LOT of people using credit to live beyond their means.  The crisis develops when the people who have been living on borrowed money can no longer make the payments.  Once the borrowers stop paying the creditors, there is suddenly a crisis.  (Note that the crisis is the proverbial ‘hangover after the party’ since it is necessarily preceded by people living high on borrowed money.)

This phenomenon highlights a curious and unflattering corner of the human condition.  Namely that people are more eager to “curse the darkness” and blame somebody else for their problems than seek a path of action that they can personally take to influence their personal situation.  This is not to say that all things are all our fault.  Quite to the contrary, there are many parties who have earned a considerable measure of blame.  However, the collective malfeasance of various players on the economic stage is not within our direct control.  Taking personal responsibility for our personal decisions is of paramount importance because our actions are the primary points of influence that we have control over in regard to our personal, professional, and financial well being.  The only way that our life will improve is if we take action. Past precedent has most clearly shown that the so-called guardians of our financial well being will look after their own interests before ours.

An unfortunate and disappointing part of the current economic situation is that the ‘solution’ being sought isn’t one of returning to responsible spending and lending practices . . . no, it is the exact antithesis of responsibility referred to affectionately as a ‘bailout.’  The extreme danger posed with the ‘bailout’ solution is that it simply subsidizes the irresponsibility that caused the problem in the first place.  My greatest fear with this ‘bailout’ mindset is that constantly rewarding irresponsibility can only lead to an increase in irresponsibility by more and more people until the problems eventually get so big that it is beyond of the ability of the government to bail out.

Simple arithmetic clearly demonstrates that the extent of government financial obligations will soon exceed its financial resources by an impossibly large margin.  This will lead to a situation where many people receive far less than they have been promised for their benefits, pensions, salaries, and many other varieties of services.  This will compel many of them to “curse the darkness” as well, saying that the problem comes from taxes not being high enough on the “rich” or from unfair foreign competition, and from a variety of other sources.  In order to endure this ensuing storm of financial darkness, it is completely necessary that we take action now so that the financial well being of our families are safeguarded.

Ultimately, there is only one way to permanently restore stability.  That is to retreat from blaming other people for the financial problems that we the people have created.  Put another way . . . instead of cursing the darkness, try lighting a candle.

 

One of the curious aspects of the human condition is that we grow to achieve comfort, but when we achieve that comfort it prevents us from growing.  It has long been said that luxury is the lull to apathy.  In practice, this means that it is difficult to reach new heights if we do not leave our present place.  For most people, this means that personal, professional, or financial growth will require that we “Dial up the Discomfort” of the conversations and decisions that we must make.

The reason why this principal takes on such importance is because we all have a natural tendency to perpetuate the standard quo.  Keeping things going the way that they have been going in the past is the path of least resistance.  The problem is that following the path of least resistance cannot be expected to produce results that are different than what has been achieved in the past.  Fundamentally, this means that each time we wish to expand and grow our personal abilities, we must push beyond the realm of our comfort zone.

Why is Discomfort Necessary?

Whether we are talking about the context of personal, professional, or financial life, dialing up our level of discomfort is necessary to grow and progress.  If our relationships never experience any friction, they will not progress … they will simply stay where they are, and may possibly slip into decline.  If a business never challenges itself to accomplish new goals, it will pass through the stage of maturity and into decline.  If our financial decisions are rooted only in the desire for comfort, it will result in many lost opportunities throughout our career.

Fundamentally speaking, the way that we grow is to break out of our current ‘normal’ and seek out a new equilibrium that generates higher and greater levels of achievement.  Once this has been achieved, a new ‘normal’ is established, and the process begins over again.  The world’s high achievers must learn that constantly challenging the limits of their comfort zone is part and parcel to the growth and development that a high achiever should expect from themselves.

How Far Should We Dial It Up?

Once a person has accepted the necessity of discomfort as a piece of personal, professional, and financial growth, it becomes necessary to determine how far we must push the envelope.  If we push too hard, it can create destructive results from failed ventures, nervous breakdowns, and the like.  Conversely, if we do not push hard enough, we cannot expect to grow and progress.  In order to achieve this “Sweet Spot” of personal and professional development, it becomes necessary that we learn to recognize how much discomfort is necessary without pushing the boundaries so hard that they collapse.

The True Hallmark of Success

The true characteristic that differentiates those who achieve success and everybody else is the number of uncomfortable conversations that they are willing to have.  This does not mean that successful people need to become a “Bull in a China Shop” who constantly disrupt the environment around them.  Rather, it is a testament to the fact that constantly growing means that we will constantly be pushing the boundaries of our comfort zone.

In this way, we should go into each day asking ourselves what we are going to do that pushes our zone of comfort?  What conversations are we willing to have that we would rather put off?  What difficult work are we stalling on by keeping ourselves busy with something else?  What do we avoid by telling ourselves that we will get to it later?  The sooner we develop the ability to take these tasks head-on, the faster our trajectory of personal, professional, and financial growth will accelerate.

In the end, each of us who seek to follow a trajectory of continued growth must find a way to consistently push our personal boundaries of comfort.  The exact way that each person dials up their own level of discomfort will be unique.  However, there is one common characteristic that is shared between the journey of all aspiring achievers.  This common thread is that we must all find a way to push our comfort zone, and find the right way to undertake this task in such a way that it propels us onward and upward, but does not wreak a destructive force upon our lives. Ultimately, this serves as one of the many challenges that all achievers must undertake.  And like all other challenges, ignoring it will not make it disappear.  It will only be accomplished if it is addressed.

 

For the more than 36 million Americans who will turn 65 in the coming decade, the best cities and towns to retire in now have a much higher bar to clear: They can’t just be great places — they have to be affordable. Each week, SmartMoney.com tours a different state to find less-expensive alternatives to the most well-known golden year destinations.

Those eager to retire in the south often make a beeline for Florida’s warm weather, sugar-sand beaches and income-tax-free living. But retirement pros say they may be overlooking a better deal in Florida’s neighbor to the north: Georgia.

What makes Georgia such compelling place to retire? For starters, while Georgia does have income tax, the state’s rules will soon be far more favorable to retirees, says Paul Jacobs, a financial planner at Palisades Hudson Financial Group in Atlanta. In 2012, $65,000 of retirement income, which includes investment income from IRAs and 401(k)s, will be exempt from state income taxes for those 65 and up; by 2016 all retirement income with be tax-exempt. On top of that, Georgia has nice weather all year round, plenty of Southern charm, world-class golf courses and — for those looking to travel in their golden years — one of the largest airports in the nation, says P.J. Protos, a financial adviser at SunTrust Investment Services in Atlanta.

Of course, some retirement destinations in Georgia are pricier than others. Take St. Simon’s, a small beach town that’s become popular with retirees for its sparse traffic, golf courses and Spanish moss-draped trees. But all that quaintness comes with a cost: The town has a cost of living that’s 32% higher than the national average, and the typical home running upwards of $400,000.

But don’t let one pricey town thwart your move to Georgia. Here are four relatively affordable retirement havens in the Peach State.

Article source: Wall Street Journal

 

One of the oldest and most frequently cited geometric axioms is that the shortest distance between two points is a straight line.  While this is most certainly true in the sphere of mathematics and geometry, the path we take through business and life rarely (if ever) moves in a straight line.  Because of this, much of our ability to realize success is dependent on our ability to adapt to the twists and turns that we are presented with on a perpetual basis.

This is especially important for our financial calculations and decisions.  It is not a secret that most financial planning models are built on the assumption of indefinite steady compounding that is expected to make you rich after a certain calculated period of time.  Of course, real life does not work in that manner.  The stock market does not compound at 9% per year, every year, with no deviation.  In some years … or in the past decade, in many years, gains do not meet expectations or values decline.

Thus, it is not just the paper performance of our decisions, but their ability to absorb uncertainty that is highly important.  The problem is that most people do not fully understand the impact of uncertainty, and even fewer people are not aware of how to make their financial plans sufficiently robust so that they can withstand abrupt, significant changes to the marketplace.

Adaptability is Key

Regardless of whether you are talking about a manufacturing line, a small (or large) business, or a financial portfolio, it is absolutely critical to ensure that your strategy is adaptable to new market realities.  The more you allow yourself to depend on static models, the more you will be susceptible to destructive changes in the marketplace.  This concept must be internalized when planning, executing, and revising our personal and professional strategies.  As reality changes, we must be able to adapt and change with it.

A simple way to understand this concept is by internalizing the following three truisms about business/life:

1. Business/Life is a game
2. The game has rules
3. The rules are always changing

If this feels highly chaotic, that’s because in many cases it is.  We cannot suffice ourselves with learning the rules (both written and unwritten) of business/life.  We must also learn how and when the rules change so that we can adjust our personal, professional, and financial decisions.  An unfortunate fact of life is that none of us possess the power to change the larger reality … we only have the ability to change the decisions we make and influence the decisions that people close to us make so that we can adapt to the larger reality more successfully.

Learning When the Rules Change

Many people make a regular habit of following the news both in print and on the internet.  The typical result of most people’s news consumption is agreement with stories support their political views, and anger at stories that stand in contrast to their personal views.  This typically manifests itself in political arguments over current events with friends, co-workers, and family members.  The only problem is that none of us have the ability to change the political reality of the world at large.  Our vote counts as one of many, many millions, and political decisions do not vary as much many are led to believe.  Politicians are wildly different in their rhetoric (what they say), but their decisions (what they do) are much more closely tied to their incentives.

At first blush, this can easily lead to a belief that the news is useless, and it is optimal to tune out.  While temping, this view is not completely accurate.  The news is not useful from the context of my ability to change the global political reality, but it is useful from the context of understanding what changes are coming in the national and global marketplace.  From this perspective, news and information take on an entirely new light.

Signal and Noise

The key to making use of what we learn through the news is the concept of signal and noise.  Within most transmissions, there is an element of useful information (signal) and an element of useless information (noise).  In everything that we see, sense, or experience, there is something we can learn (signal) and there is everything else (noise).  The challenge that we have as people and as businesses is to act on the signal, and not on the noise.  In practice, this is much easier said than done.  In following the news, we should not be simply looking for stories that either confirm or conflict with our beliefs, but looking for useful information signals that can help us make better personal, professional, and financial decisions.

In the end, each of us will be able to achieve the best results if we realize the importance of adapting our strategy and decisions to a changing marketplace, while using the signals that we gain from our everyday experience to inform better decisions in the future.  By learning to do this on a consistent basis, it will allow us to perpetually move closer to our goals, dreams, and aspirations.

 

A larger share of people’s savings is winding up in IRAs—even as estate-tax rules are getting trickier and the markets are growing more volatile.

All of this is making life more complicated for widows and widowers, and could cause them to make significant mistakes with their money.

“There’s so much fear and anxiety, even if you have everything in place,” says Karen Altfest, a certified financial planner in New York who often works with surviving spouses.

One big problem: Standard advice that doesn’t fit your situation—such as rolling your spouse’s individual retirement account into your own. Don’t follow any rules of thumb before weighing them against your own circumstances.

Here are some of the most common mistakes that widows and widowers make while sorting out their inheritance:

Paying unnecessary IRA penalties. If you inherit an IRA from your spouse, you can roll it over into your own IRA. In fact, some IRA custodians and 401(k) plans automatically do that unless the surviving spouse’s financial planner intervenes. Such a “spousal rollover” generally makes sense if you are at least 59½ years old, the age at which you are allowed to start tapping an IRA without paying a 10% penalty on early withdrawals—though you will still owe income tax.

But the median age for women widowed the first time is 59.4, according to the U.S. Census Bureau. That means many widows are younger than 59½, and if they need to tap IRA assets to supplement their income or cover other expenses, they would have to pay that 10% penalty.

People under 59½ often are better off transferring the money into an “inherited IRA,” which remains in the deceased spouse’s name, and then transferring it into their own IRA when they hit the age when withdrawals are penalty-free, says Michael Lynch, a certified financial planner with MetLife’s Barnum Financial Group in Shelton, Conn.

With an inherited IRA, most beneficiaries have to take a required withdrawal every year based on their life expectancies. But if the deceased spouse was not yet 70½, the surviving spouse doesn’t have to take any required distributions until the year the deceased spouse would have turned 70½. (With an inherited Roth IRA, you still would have to follow the same withdrawal schedule, but you generally wouldn’t owe any income tax.)

One 50-year-old widow who Mr. Lynch worked with recently already had planned to quit her job to go back to school when her husband died, so he encouraged her to use IRA withdrawals for tuition and living expenses. That way, her income, and her corresponding tax bracket, would be relatively low while she wasn’t working.

“So often all the focus is on deferring taxes, but you’re going to pay taxes [on IRA withdrawals] eventually,” Mr. Lynch says. “It’s better to do it when you’re in a lower bracket.”

Portfolio paralysis. What about the investments inside the inherited IRA, or inside any inherited brokerage accounts? The portfolio should reflect the survivor’s circumstances, Ms. Altfest says, not the couple’s.

She says she has had clients come to her because their deceased spouse frequently traded stocks or owned lots of high-risk commodities they knew little about.

Ms. Altfest suggests widows assess their own risk tolerance, seeking help from a financial planner to do so if they need it, and then redeploy the assets in investments with which they are comfortable.

“Find somebody who’s sympathetic and interested in teaching you as you go along what to ask about,” she says.

Forgoing future estate-tax breaks. Under federal law, spouses can use what as called “portability” to double the $5 million estate-tax exemption to $10 million.

But there is a catch: Even if the first spouse’s estate is valued at less than $5 million, that estate still has to file a federal estate-tax return and elect portability to use the leftover exemption in the future, says Paul McCawley, an estate-tax lawyer at Greenberg Traurig in Fort Lauderdale, Fla. (The law, enacted late last year, expires after 2012, though many tax-policy experts think Congress may make the portability perk permanent.)

Say the wife dies first with a $1 million estate, which doesn’t necessarily have to file an estate-tax return. But the husband runs a growing business and someday could wind up with a multimillion-dollar estate. His wife’s estate should file a tax return electing portability, Mr. McCawley says, so that down the road the widower’s heirs could add the remaining $4 million exemption to his $5 million one.

Still, filing an estate-tax return when isn’t required is a bit of a hassle, especially with portability’s future uncertain. An estate-tax return “can easily cost a few thousand dollars,” Mr. McCawley says, and there are often extra appraisal costs.

An estate also can get hit by state-level estate taxes in about a dozen states with estate-tax thresholds that are less than $5 million, says James Cundiff, a partner at McDermott Will Emery in Chicago. Such taxes can apply when the first spouse dies and again when the second spouse dies. Trusts can help defer such taxes.

In Illinois, for example, the amount exempt from estate tax is $2 million. So if your spouse leaves you $5 million in a trust, you would owe Illinois estate tax on $3 million. To defer that tax until you die, you could divide the trust into two—one a $2 million trust and the other a $3 million trust—and make what is called a “qualified terminable interest property” election, Mr. Cundiff says.

If Illinois eliminated that tax before the second spouse’s death, the estate might never have to pay it, he says.

Collecting Social Security too soon. Surviving spouses are allowed to start collecting Social Security survivor benefits at 60—but, as with Social Security retirement benefits, they would get a smaller amount each month than they would if they waited until their full retirement age. For more information, go to ssa.gov/retire2/agereduction.htm and ssa.gov/survivorchartred.htm.

Write to Kelly Greene at familyvalue@wsj.com

Article source: Wall Street Journal

 

By LIAM PLEVEN

“Times are hard,” said Virginia Rodriguez, a hospital technician and mother of two, explaining why she has used earrings, rings and a gold cross and chain bequeathed by her grandfather in exchange for loans of nearly $1,000.

The jewelry has been pledged as collateral to Provident Loan Society of New York, which operates from an austere limestone structure on Manhattan’s Park Avenue South. Created amid the Panic of 1893 by tycoons such as J.P. Morgan and Cornelius Vanderbilt, business has surged during the most recent climb in gold prices.

Pepa Abad Toledo uses her gold jewelry as collateral to borrow money from Provident Loan Society of New York, which was created amid the Panic of 1893.

On Wednesday, gold settled at $1,823.50 per troy ounce. Prices are up 28% so far this year, at a time when other coveted commodities such as crude oil and copper have fallen in 2011 and the Dow Jones Industrial Average has dropped 2.8%.

For hedge funds and hordes of individual investors, gold’s climb is a chance to profit from the declining U.S. dollar and fears about the European financial crisis.

Developer Donald Trump said this week that he would accept a security deposit in gold at his new tower in Manhattan’s Financial District.

But some people like Ms. Rodriguez regard gold as less of a safe haven than a last resort, shedding heirlooms and treasured keepsakes in order to pay basic bills. Ms. Rodriguez has used the loans she’s taken out from Provident in recent years, which carry a 13% interest rate over six months, to pay for rent, cable television and a cell phone, all examples of “what you need every single day,” Ms. Rodriguez said.

From 2005 to 2010, U.S. sales of used gold jewelry and other scrap jumped 137% to 143 metric tons, according to consulting firm GFMS Ltd.

Since then, the U.S. economy’s growing troubles and turbulence in the financial markets—not to mention the abundance of late-night television advertisements touting “cash for gold” offers—are prodding more Americans to sell the precious metal while prices are high.

“There’s definitely more interest in people selling gold” since the U.S. government’s long-term credit rating was downgraded by Standard Poor’s in early August, said Ron Lieberman, owner of Palisade Jewelers in Englewood, N.J.

In August, gold prices hit record highs in nominal terms on 10 days during the month. Gold finished the month up 12%.

“The discussion of the high gold price brings out gold,” said David Firestone, president of Firestone and Parson Jewelers in Boston.

Sellers also are digging deeper into their personal gold stocks and parting with items that have greater sentimental or financial value than they were willing to sell when the economy was better.

“Up until about six months ago, we didn’t really see the family heirlooms,” said Scot Congress, who owns Congress Jewelers on Sanibel Island, Fla., which caters to high-end clients and also buys gold. “Especially lately, it’s been to make ends meet, which is especially frightening to me personally.”

Provident promotes itself as “better than a pawn shop,” targeting customers who it believes will be able to get their gold back once their financial circumstances improve. Provident says its interest rates are “substantially lower” than the limit imposed on New York pawnbrokers. When the company was born, the U.S. also was battered by foreclosures and bank failures, according to Eugene White, an economics professor at Rutgers University.

Gold typically makes up roughly half of the collateral that Provident takes in, but that proportion has climbed recently, said John Higney, the company’s chief operating officer. “We have seen a lot of gold,” he said in an interview.

In addition to rising gold prices, Provident is getting a boost from a new advertising campaign: Business at a satellite office in the New York City borough of the Bronx has picked up “drastically” since the campaign started.

Provident does not set the loan values based on daily fluctuations in the gold price but periodically adjusts them to reflect market moves. The amount loaned per ounce of gold has nearly tripled in less than five years.

Some customers use Provident because they find it easier than getting a traditional loan. “It’s a big problem now with the banks,” said Pepa Abad Toledo, who uses Provident loans to buy merchandise for her business selling costume jewelry. She currently has an $800 loan from Provident for which she used eight gold rings, two pins and two earrings as collateral.

If a customer doesn’t repay a loan, Provident sells the jewelry at public auctions. Ms. Rodriguez decided to surrender a couple of pieces she was using as collateral because they had little sentimental value to her. She still hopes to get her grandfather’s cross and chain out of hock.

“I can’t let that go,” she said. “I like my gold,” she added, but she wasn’t wearing any “because it’s all here.”

Write to Liam Pleven at liam.pleven@wsj.com

Article source: Wall Street Journal

 

How are we going to pay for college? That’s the question families are increasingly asking themselves as they see education costs soar while their savings dwindle.

Just when college savings and other investments were starting to recoup some of the heavy losses of the past few years, markets took another tumble earlier this month. State budgets are still constrained, forcing many public schools to further raise tuition, reduce aid or cut grants altogether. Private universities are raising tuition as well, and in some cases, offering less aid. And deficit-reduction efforts could lead to cuts to federal programs such as the Pell grant.

All this makes it all the more urgent to get started on a plan. Here’s a three-year countdown on what you should be doing and when you should be doing it.

Three Years Out

Savings: While you’ve hopefully been setting money aside since your teen was a baby, this is the time to get your college savings on the fast track. “The greatest asset is time,” says Mark Kantrowitz, founder of financial-aid sites FinAid.org and Fastweb.com.

You can’t afford a lot of investment risk this close to the college years, but unfortunately interest rates on savings accounts and certificates of deposit are pretty paltry these days. And they’re likely to stay that way with the Federal Reserve indicating earlier this month that it will keep interest rates low through mid-2013.

So your best bet for boosting college savings is still a tax-advantaged plan, such as a 529 college-savings plan and Coverdell Education Savings Account. These accounts let you withdraw money tax-free to pay for qualified education expenses.

Many 529 plans took a hit during the recession and the recent market dives. So many states have added safer investments, such as CDs, to their plans. Investments and fees vary by plan. And annual contributions to a 529 plan exceeding $13,000 may be subject to a gift tax. You can compare all 529 plans at Savingforcollege.com.

If you have an underperforming or high-cost plan, you can roll over your money to another state’s plan once a year, but fees may apply. Some states offer tax breaks as well.

A Coverdell is like an individual retirement account, with your child serving as beneficiary. There are income limits for contributing to a Coverdell and you can put in a maximun $2,000 per child per year.

Financial Aid: It’s never too early to start thinking about how much financial assistance you can get — and from where.

Online tools, such as SimpleTuition.com’s TuitionCoach, can help you figure out where to put your money to qualify for the most aid, depending on the individual college and the methodology it uses for financial aid.

Janet Krochman, a certified public accountant in Costa Mesa, Calif., says you should start juggling money now so it won’t weigh as heavily in the calculation when you apply for aid. But speak to an accountant or financial adviser before making any moves. For instance, discuss whether to keep a child’s money in his or her name or transfer it to your name.

Start searching and applying for scholarships and grants. Fastweb.com has a free tool that matches your child with scholarships. You also should reach out to your child’s guidance counselor, your employer, and religious and service organizations about scholarship and grant options.

Two Years Out

Savings: Continue funding your 529 and other savings accounts, upping the amount if possible. This also is the time to start taking a serious look at potential schools — and estimating the cost of each.

Starting in October, schools that award federal financial aid are required to publish a net price calculator (most on their websites), which lets you enter basic financial information to get an estimate of the school’s bottom-line cost of attendance and how much need-based aid a student could get.

Financial Aid: If you’re planning to sell assets to help pay for college, and will have capital gains, some financial advisers say now is the time to do so. You don’t want to show a big capital gain on tax returns you’re going to submit to the school, Ms. Krochman says.

When planning campus visits, make an appointment with the financial-aid office to learn how the school determines financial need. Schools use the same formula for federal aid but some consider supplemental income and assets.

Loans: You still don’t know how much you’ll need to borrow, but you should start looking at your loan options — including federal loans for students or parents and private bank loans, which can have fixed or variable rates.

One Year Out

Savings: By this point, you should have the bulk of your money in less-risky investments, such as money-market funds, CDs and Treasurys, since you won’t have much time to recoup any losses. Mr. Kantrowitz says no more than 20% of college savings should be in at-risk investments when your child is this close to college.

Financial Aid: Your child will be applying to schools and filling out the Free Application for Federal Student Aid, or Fafsa. Be sure to submit all necessary paperwork. Delays could hurt your chances of getting money since some schools dole out aid on a first-come-first-served basis. If you haven’t already done so, apply for grants and scholarships.

Loans: Once you’ve figured out how much you’ll need to borrow, first look into federal loans, which typically have the lowest interest rates. There are the Perkins and subsidized Stafford loans for students and the federal PLUS loan for parents. Private bank loans should be your last option since they tend to have higher rates.

When it comes to borrowing, “a good rule of thumb,” Mr. Kantrowitz says, is that the “total debt at graduation should not exceed your child’s expected starting salary” upon graduation.

Write to Emily Glazer at emily.glazer@wsj.com

Article source: Wall Street Journal

 

They’re mad as hell, and they aren’t going to buy the dips anymore.

Much has been made of the billions of dollars that small investors have been pulling out of stock funds. However, some $4 trillion sits there—and most people still aren’t selling. Too frightened and angry to buy, they are simply watching with a sense of helpless horror.

Greed may be good, but these days, investors are more likely to be consumed by another emotion: rage. Jason Zweig explains on The News Hub.

In an online survey conducted between Aug. 9 and 15, a team of psychologists led by Paul Slovic of Decision Research in Eugene, Ore., probed how the latest financial turmoil has affected the mindset of Americans. The survey has been conducted eight times since the fall of 2008 among hundreds of people nationwide, asking the same questions of many of the same investors.

Americans are afraid not just of today’s terrible markets but of a worse tomorrow. The survey asks whether the latest “financial challenges will limit your future opportunities to pursue your objectives in life.” This month, 58% of investors said they believed that their future would be “moderately” or “greatly” limited, up from 56% in March 2009.

Asked how angry they felt “about the financial challenges facing our country now,” 59% said they were “moderately” or “very” angry; 52% said they were moderately or very fearful. The proportion who felt at least some anger and fear hasn’t fallen at all since the depths of the financial crisis in March 2009. When asked this month if they worried “about money yesterday,” 73% said yes—up from 56% 2½ years ago.

In March 2009, 17% of investors in the survey felt they had a strong or very strong degree of “influence or control” over their financial lives. This month, only 11% felt they did.

The mood of investors is at least as bad as in the darkest days of early 2009, when the financial world itself seemed about to end.

The old Wall Street cliché that “money chases performance” may need to be revised. Individual investors didn’t pile into the stock market even as it roughly doubled in the 12 months after March 2009; nor, in this slump, are most investors abandoning stocks or making major portfolio changes. Scott Salaske, a financial adviser at Portfolio Solutions in Troy, Mich., says that Thursday morning, even as the Dow was dropping 500 points, not a single one of the firm’s 530 clients called or emailed to get advice or request a trade.

People seem to feel like bystanders in their own financial lives—almost as if they were spectators at a racetrack equally incapable of stopping an impending car crash and of tearing their eyes away from it.

Two-thirds of the investors in the Decision Research survey said they had spent at least one hour a day over the previous week following the financial news. Yet a mere 6% bothered to call a financial expert for advice. And fully 51% of the investors said they hadn’t even checked the performance of their own portfolios.

Nearly two-thirds of investors in the survey said they didn’t plan to make any changes to their stocks and mutual funds over the next 12 months. Only 10% said they had changed their investments in the previous week to reduce risk—down by half from the same survey in September 2008. Just 6% said they had taken riskier positions in response to the market turmoil.

Asked whom they trusted to make their retirement savings safer, 73% said they had “little” or “no” trust in the Obama administration; 87% had little or no trust either in Congress or in bankers and brokers.

Fritz Dixon, 78 years old, is a retired public-health physician in Meridian, Idaho, who has pulled out of the stock market over the past decade after a series of sharp losses. At this point, he says, he doesn’t have a dollar in stocks, and the odds that he will ever buy another stock are “zero.”

Christophe Vorlet

Dr. Dixon feels anger and distrust toward the government and the markets alike. “All the Federal Reserve does is look at the stock market and the big banks and figure out how to bail them out with my money,” he says. “Then the bankers pay my money out to themselves as bonuses while the Fed keeps on depreciating all the savings that I worked so hard to build up all these years.”

Dr. Dixon adds, “You can shear a sheep many times, but you can only skin him once. And I ain’t gonna lose any more skin.”

In the short run, it always feels better to be a buyer when the market is euphoric; in the long run, the investors who make the most money are those who buy when the market is miserable. For investors full of anger and fear, however, benign neglect might be the best they can muster.

Article source: Wall Street Journal

 

Recent gyrations in the financial markets resulting from the recent downgrade of US government credit by Standard and Poors has been a roller coaster ride for investors.  Persistent decreases followed by a sharp increase, then a decrease, and another increase has investors wondering what to expect next.  The financial markets have become a roller coaster of volatility.  And this roller coaster is not only constrained to stocks.  The debt downgrade created a paradoxical result of stoking new fears for widespread default in the euro-zone, and actually channeled more capital toward US treasuries, which pushed down yields.

In addition to this, the housing market is still extremely soft, with very few buyers able to qualify for financing, and very few sellers able to price their property at the market rate, due to being under water on their loans.  In addition to this, there is still a persistent hangover of foreclosure inventory that is dragging on the resale of properties.  This has created a strange dichotomy in many markets where new construction or default/foreclosure properties are the only inventory that sells.  This creates another roller coaster for people attempting to move resale property since the intensity of competition results in lowball offers and excessive demands from buyers that would have been completely unheard of in the past.

What this all comes down to is the fundamental truth that the future is intrinsically uncertain.  During the stock market bubble of the late 1990′s and the real estate bubble of the early 21st century, people came to expect continued rapid escalation of their investment assets.  The resultant collapse of these bubbles left many people in dire financial condition.  This problem was amplified even more so with the most recent bubble, due to the high number of people who had purchase property with high rates of leverage.  This meant that when the values compressed, the owner suddenly found themselves ‘upside down’ with more in debt than the market value of their property.

Now that we are in the middle of sorting out the mess from the real estate bubble, people are wondering what to do.  This problem is further complicated by the fact that our current economic difficulties are being addressed with many of the same policies that created the last bubble.  This has led many to speculate that a new bubble of some sort is in the process of forming.  With all of these swirling factors to consider, many investors are befuddled and confused.  Most people just want to earn a reasonable rate of return so that they can retire in relative comfort.  However, this task is proving to be much more difficult than financial planners make it out to be.

Opportunistic Investing

In a market environment that is highly volatile, the best results typically come from being opportunistic.  This means acquiring investment assets when confidence is low and buyers are distressed.  For stock market investors, this means finding companies that are fundamentally strong, and pay good dividends, then targeting them for purchase when market values dip.  In this way, investors purchase a stream of future dividend cash flows for a rock bottom price.  This strategy can also be employed for growth based companies as well, but it relies exclusively on future value appreciation, which is more volatile, but can also deliver greater total returns.

For property investors, market dips are the best time to acquire income producing real estate assets.  This is especially true since the high rates of default and foreclosure are driving many people who used to be homeowners into the renter pool.  Over time, this will become a boon for income property investors, as the overall increase in the renter population strengthens rents.  It means that investors must deal with the inevitable difficulties that accompany tenants and rental properties.  However, many investors are finding that the risk of tenants is preferable to the roller coaster volatility of financial markets.

Dynamic Course Adjustments

Another key characteristic of success in the current market environment is the ability to change course as the financial landscape evolves.  The strategies that worked best in the past may not be optimal in the future.  The investments that work the best now may not work the best in 20 years.  Astute investors must do more than “follow a system” … they must “create a strategy.”  The strategy should be what informs your decisions.  The strategy should be bigger than a single investment category, and it should encompass more than simply making money.

The purpose of a strategy starts with what you are attempting to achieve with all of your income producing activities.  It could be retirement, it could be a lifestyle, it could be paying for your children to attend college.  Whatever the goal is, it is very important to understand that part of your strategy first.  The second most important characteristic is your risk tolerance.  By and large, the more volatility and hassles you are willing to deal with, the higher rates of return you will be able to achieve.  However, these rates of return will not come in a smooth, even stream.  In order to achieve the “Big Kid” rates of return, you will need to move beyond packaged investments like mutual funds.

Once your end-state goal and risk tolerance has been defined, then it is time to decide what category of investment and specific opportunities are right for you.  The answer to this will most certainly be different for everybody.  Thus, it is less important to find the “best” opportunity, and far more critical to find the “right ” opportunity.  The way that you will be the most successful in business and in life is to pursue the opportunities that are right for your personality, temperance, and life situation.

 

In Don Marquis’ classic satirical book, “Archy and Mehitabel,” Mehitabel the alley cat asks plaintively, “What have I done to deserve all these kittens?”

That seems to be the pained reaction of the Obama administration to the financial woes that led to the downgrading of America’s credit rating, for the first time in history.

There are people who see no connection between what they have done and the consequences that follow. But Barack Obama is not likely to be one of them. He is a savvy politician who will undoubtedly be satisfied if enough voters fail to see a connection between what he has done and the consequences that followed.

To a remarkable extent, he has succeeded, with the help of his friends in the media and the Republicans’ failure to articulate their case. Polls find more people blaming the Republicans for the financial crisis than are blaming the President.

Why was there a financial crisis in the first place? Because of runaway spending that sent the national debt up against the legal limit. But when all the big spending bills were being rushed through Congress, the Democrats had such an overwhelming majority in both houses of Congress that nothing the Republicans could do made the slightest difference.

Yet polls show that many people today are blaming the Republicans for the country’s financial problems. But, by the time Republicans gained control of the House of Representatives, and thus became involved in negotiations over raising the national debt ceiling, the spending which caused that crisis in the first place had already been done — and done by Democrats.

Had the Republicans gone along with President Obama’s original request for a “clean” bill — one simply raising the debt ceiling without any provisions about controlling federal spending — would that have spared the country the embarrassment of having its government bonds downgraded by Standard Poor’s credit-rating agency?

To believe that would be to believe that it was the debt ceiling, rather than the runaway spending, that made Standard Poor’s think that we were no longer as good a credit risk for buyers of U.S. government bonds. In other words, to believe that is to believe that a Congressional blank check for continued record spending would have made Standard Poor’s think that we were a better credit risk.

If that is true, then why is Standard Poor’s still warning that it might have to downgrade America’s credit rating yet again? Is that because of the national debt ceiling or because of the likelihood of continued runaway spending?

The national debt ceiling is just one of the many false assurances that the government gives the voting public. The national debt ceiling has never actually stopped the spending that causes the national debt to rise to the point where it is getting near that ceiling. The ceiling simply gets raised when that happens.

Just a week before the budget deal was made at the eleventh hour, it looked like the new Republican majority in the House of Representatives had scored a victory by getting the President and the Congressional Democrats to give up the idea of raising the tax rates — and to cut spending instead. But now that the details are coming out, that “victory” looks very temporary, if not illusory.

The price of getting that deal has been having the Republicans agree to sitting on a special bipartisan Congressional committee that will either come to an agreement on spending cuts before Thanksgiving or have the budgets of both the Defense Department and Medicare cut drastically.

Since neither side can afford to be blamed for a disaster like that, this virtually guarantees that the Republicans will have to either go along with whatever new spending and taxing that the Democrats demand or risk losing the 2012 election by sharing the blame for another financial disaster.

In short, the Republicans have now been maneuvered into being held responsible for the spending orgy that Democrats alone had the votes to create. Republicans have been had — and so has the country. The recent, short-lived budget deal turns out to be not even a Pyrrhic victory for the Republicans. It has the earmarks of a Pyrrhic defeat.

To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate Web page at www.creators.com. Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com.

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Article source: Creators.com