Bad Examples – Page 24

Financial Retard of the Month

August 26, 2011

Time for a new feature on Control Your Cash, where we’ve taking to scouring the internets to find personal finance bloggers we can hold up as examples of what not to do with your money. We’re thinking of doing this weekly, although we could probably feature a different retard every hour.

Our heroine (artist's conception)

Today’s honoree is Sallie’s Niece, who lives in New York state and is busy creating an anti-nest egg. (NOTE: We’re not providing links. She doesn’t need the traffic from a popular blog like ours. But you really should witness this foolishness firsthand.)

Her disclaimer (everyone has a disclaimer, except us) starts off with the funny:

I am in NO way qualified to answer any financial questions

You’ll find out why shortly. The “Sallie” in question is Sallie Mae, the money-losing boondoggle that enables people ostensibly on the cusp of adulthood to defer productivity for years if not decades. To hear the niece in question describe it,   

I’m a 30 (gasp!) year old professional woman struggling to pay off my student loans, live on a budget, and plan for the future.

Here at Control Your Cash, we’re old enough to remember when “professional” meant something. It meant that you were a doctor or an engineer, not that you simply had a job.

Guess how many student loans this financial drain took out? Remember, she’s an individual, not sextuplets.
SIX. Six freaking student loans. Including a law school loan that she managed to pay off. We’ll let you know the parade route once it’s scheduled. Rounded to the nearest thousand, her remaining loans total $40,000, $33,000, $21,000, $19,000 and $6,000. For a total of $118,000, a debt which no 30 (gasp!) year-old should incur unless she’s buying a house.

Still got some food remaining in your gullet? Here’s an emetic we can all enjoy. This woman works in some level of government and is, well, we’ll quote the original source:

Assuming I make the same salary for the next 6 years I will have contributed about $14,000 to my pension. Then I stop contributing but keep working for at least 10 more years. How much do I get?
Using a final average salary of $49,312, when I am 57 years old I will have 30 years of service credit. I will thus be eligible for a Single Life Allowance of $29,587 a year. That’s 60% of my final average salary. All for contributing just $14,000! This is totally morbid but even if I only collect for one year I am getting 2x my money back!

Why are state and municipal governments (to say nothing of the big one in Washington) drowning in debt? No idea whatsoever. Can’t quite place our finger on it.

Where would your priorities be if you were carrying $118,000 in student loans, while financing a laptop; carrying a credit card (you’re not going to believe this, but there’s credit card debt, too); borrowing money from a friend, a fiance-cum-husband and your mom; and aren’t even organized enough to pay your water bill on time? Don’t know about you, but we’d spend $7000 on a wedding!

You know, that change in your legal status that any justice of the peace can handle if you spend $40 on a license. But what’s the fun in that, when you can spend $6,960 more? You’d have to be crazy to apply that money to your student loan balances instead.

It’s the brazenness that gets us more than anything else. One of this woman’s stated goals is to increase her net worth to -$100,000 this year. She hopes to one day achieve the rarefied financial air of her husband (she calls him “DH”, for “dear husband”, and isn’t that precious?), who last clocked in at a robust -$15,000.

She uses terminology such as “fun money”, which we can only assume goes for pedicures and other non-assets. Listen: if you’re $100,000 in the hole, you don’t get “fun money”. You get debt reduction money, and maybe a buck or two to feed and clothe yourself with.

People often ask the CYC principals how we’ve managed to lead lives of relative affluence. Two answers. One, read the book. Two, by not doing the same idiotic, self-destructive crap that other people do. This doesn’t require anything beyond a 1st-grade comprehension of math. At its absolute most basic, income > expenses. Replace the > with a = or a <, and you can’t build wealth. Even if you’re sucking at the public teat like our friend Sallie’s Niece.

Here’s our favorite line from her archives, from April:

(The husband and I) recently combined finances.

Oh, this is going to end spectacularly. If you’ve never heard Mark Steyn’s line about dog feces and ice cream (or in this case, dog feces and slightly less pungent dog feces), Google it.

It gets even better. She donates to the Corporation for Public Broadcasting, completely unaware that she’s the charity case. What’s the best way to help poor people? Not adding to their ranks. This isn’t a case of there always being someone less fortunate than you. This is a case of needing to get your own house in order before vacuuming the neighbors’ carpets.

(NOTE: We’d originally used American Cancer Society as our example in the preceding paragraph, but a couple of clicks later we found she’s also donating to the starving unfortunates who run taxpayer-sponsored television that nobody watches. In her words, “I can’t imagine a world without PBS.”)

$200 concert tickets. Trips to Mexico. A “fabulously unfrugal (sic) Hawaiian honeymoon.” She used boldface 24-point type with exclamation points to announce when her consumer debt got down to $122,000. And there’s also:

The base price of my (wedding) dress is $1100, plus planned alterations of $150 and taxes of $104, the total comes out to be $1354.

It never stops. You know what? Forget about the two-pronged advice we just gave about how to build wealth. Instead, simply do the exact opposite of everything Sallie’s Niece does and you’ll be swimming in it.

Make sure you read the congratulatory comments, too. If there’s one thing we Americans do better than anyone else, it’s celebrate non-achievement. Like the morbidly obese woman who shrinks from 800 pounds down to 780, and whose case worker commemorates the meaninglessness by passing out hugs and Pixy Stix. Instead of celebrating the woman who’s always weighed 120 pounds and who goes to the gym every day and eats healthily to maintain that weight.

Oh, and sure enough, Sallie’s Niece is fat. It stands to reason: if you’re grossly undisciplined in one aspect of your life, you’ll be grossly undisciplined in most of them. We couldn’t locate any pictures of her, but people who aren’t fat don’t join Weight Watchers. (Nor do they join a gym as a New Year’s resolution, the surest sign that those pounds are not only staying on but inviting some friends to join them.)

Also, it’s a cleft palate, not a “cleft palette”. (Worst art supply ever.) Look, it’s one thing to make worse financial decisions than a Holstein cow would make. What we don’t understand is why she considers her stunning lack of acumen to be something worth sharing with the world.

And she smokes. Of course. And she “could use a Halloween costume.” (Again, 30 [gasp!] years old.)

Damn. The Chinese can’t invade our shores us fast enough.

**This article is featured in the Carnival of Personal Finance #324: The Universe Edition**

Filed Under: Bad Examples, Financial Retard of the Month Tagged With: bimbo, can't spell, drinker, fat, fat people, idiot, imbecile, moron, narcissist, retard, smoker

Control Everything But Your Cash

August 24, 2011

We're running out of metaphors

There’s an argument for being contrarian, and a solid one. A true contrarian would have emerged from the recent housing crisis not only unscathed, but rich. In its simplest incarnation, contrarianism means exactly what it sounds like: buy when everyone else is selling, and vice versa.

The reason this doesn’t work when you follow it to the letter is that it means you would have sold Google stock when the rest of the world was pushing it up from $100 to $579; and you would have bought GM stock when everyone else was jumping off, anywhere from $72 down to its eventual delisting. Over the course of the stock market’s history, you would have lost money.

A popular hypothesis is that of the “permanent bull market”, which states that any downturn in the market, however long, is but temporary. Accounting for inflation, the Dow is well ahead of where it was when it started and it always will be over any given period if you just wait long enough. Therefore, just wait long enough.

The problem is that humans have life expectancies on the order of only a few boom-and-bust cycles. Generalities don’t really help when formulating an investment strategy. Yes, you can figure out which stocks to buy by analyzing fundamentals – in fact, we recommend it because we can get you started for a mere $3.50 – but even that implies that there’s a future worth investing in.

Not to go completely nihilistic on you, but ask yourself the following questions. Seriously. Don’t just read them, think about the answers.

Is there a particular number the Dow could rise to that would give you confidence in the American economy?
If so, what’s that number?
When do you realistically think we’ll get there?
(And did you factor in inflation?)

I recently asked the president of a publicly traded foreign company this very set of questions. Conducted orally, so he couldn’t see which one was coming next. Here were his answers:

Yes
13,000
(hesitating) 2013? Maybe 2014.
(more hesitation)

Crossing your fingers and trying to convince yourself that things can only get better is better than being pessimistic, it would seem, but eventually you have to start quantifying things and weighing your situation against inflexible time horizons. Us each getting a year older every 12 months is the only constant. What the economy does is, of course, variable.

The following are not opinions:

America’s credit rating now at its lowest level ever, on par with Belgium’s.

If the Greek or Irish economy tanks, the damage can be somewhat contained. Not so for the country with by far the world’s largest GDP.

With a few notable exceptions, no member of either party in the United States government’s legislative or executive branches is remotely serious about reducing its size (and therefore reducing the size of its current and future obligations.)

Those same government functionaries have all but stated that their goal is to eliminate risk, which is a functional impossibility. Of course, the buzzwords they use are far more benign (“keep Americans in their homes”, “make the rich pay their fair share”, “put America back to work” et al.)

People are at least finally learning how to save.
(Ha! Just kidding. It’s true that that’s not an opinion, but it is a falsehood. People are borrowing more than they have in years.)

——–

The consensus opinion among the populace seems to be to wait and see. But an enterprising contrarian can’t decide to simply do the opposite of nothing.

At Control Your Cash we try to keep away from giving specific investment advice. Not because we’re not professionals, but because our M.O. has always been to teach people to fish. That being said, it’s time to champion hard assets.

Real estate is finite. With a growing population, it would seem that real estate’s value will always increase in the broadest of terms. (People need to live and conduct business somewhere.) Gold and other precious metals are finite, at least until alchemy makes a comeback.

“But technically, everything is finite”, you argue. Which would be true if we’re restricting our discussion to the tangible. But there is literally no limit to the money a worrisome government can create. If you don’t believe that, or think it’s an overreaction, go ask a Zimbabwean. Or a Weimar-era German, if there are any left.

Inflation isn’t just a devaluing of the currency. It’s a way to punish the poor at the expense of the rich (because rich people, almost by definition, keep a smaller ratio of their wealth in cash than poor people do. Rich folks can buy assets and hold onto them. Those whose wealth consists primarily of cash aren’t just too tempted to spend it, they’re too subject to the machinations of a market that conducts business in weakening dollars.)

Sooner or later, a government with overwhelming obligations and too many creditors will have no choice but to employ the nuclear option: if you owe lots of dollars, it makes sense to make each dollar you owe worth less. If you can do it, that is. You can’t. Governments can. And shortly, will.

**This article is featured in the Yakezie Carnival-September 11th, 10th Anniversary Edition**

Filed Under: Bad Examples, Capitalism, Consumer Debt, Net Worth, Personal Finance Tagged With: default, devalue, Inflation, Standard & Poor's, Taxes

You have no freaking idea, do you?

August 19, 2011

She's an otter. What's your excuse?

Where’s your money invested? TELL ME. NOW. No checking resource materials.

Here’s another difference between those with the propensity for wealth and those without. A rich person can give a semi-detailed answer to the above question immediately. A person who’s treading water can’t.

If you have a regular job, and you don’t have a 401(k), insist on opening one the next time you’re in the office. Also, ask if your employer matches your contributions. [This post isn’t about the vagaries of the 401(k); we’ll write about that soon enough. But just know for now that you can contribute 15% of your income to retirement savings, which will immediately reduce your taxable income by 15% and possibly put you in a lower bracket. Plenty of employers also “match” employee contributions up to a certain limit, which makes it free money if you want it. You like money, right?]

The “legacy” rich people have real estate and collectible art. For most of the rest of us, building through a 401(k) will have to suffice. So assuming you have a 401(k), where do the actual monthly contributions go?

Probably in a mutual fund. But which one, and are you happy with the results? Do you even know what the results are? Do you even bother opening the monthly statement to see which components rose and which fell? While it’s crazily obsessive to check stock prices every day, it’s even crazier to check them once every 40 years.

There’s a fair chance that your 401(k) is a part of the Capital Income Builder Fund from American Funds. We picked the Capital Income Builder Fund pseudorandomly; it’s one of America’s 10 biggest mutual funds. Let’s assume your 401(k) is indeed in this particular fund. You might want to know that this fund consists of:

25% The PMI Group (a mortgage insurer)
25% Horizon Lines (shipping containers)
25% AbitibiBowater (pulp and paper)
25% Allied Irish Banks (one of Ireland’s 4 biggest commercial banks.)

Isn’t that nice and diversified? Those industries are all over the map, right?

Alright, that was a lie. We just selected the 4 companies that have lost the most value on the New York Stock Exchange over the past half year (87, 83, 75 and 75%, respectively.)* But if you asked the average 401(k)holder if she holds any of those companies in her mutual fund, she probably couldn’t answer definitively.

Here are the actual components of the Capital Income Builder Fund. But before we get started, how big do you think its biggest component is? Stop here, just take a guess. We won’t screw with you again, honest. Just make an educated estimate as to what percentage of the fund is made up by its biggest component.

(That’s 2 tobacco manufacturers in the top 4. Death paradoxically remains a growth industry.)

GDF stands for “French Gas”, in French. It’s the world’s largest utility, selling mostly natural gas and electricity, although you’d never figure that out from a visit to their website loaded with buzzwords. “Southern” in “Scottish & Southern” refers to southern England: the company was created by a merger.

This is nothing unusual: mutual funds like the one your 401(k) is invested in really are that diverse. But we’re ten components in, and 91.1-92.1% of the fund’s value is still unaccounted for. So what companies is the lion’s share of the Capital Income Builder Fund invested in?

Beats us.

American Funds’ own site doesn’t give us any specifics, only vague generalizations about market sectors and types of component.

If you’re one of the millions who are invested in this fund, you should be outraged that your fund manager keeps your investment such a secret. It’s not quite a secret – you can doubtless contact the investor relations department for a full breakdown – but you shouldn’t have to. Furthermore, what incentive does American Funds have to attract new investors when they won’t let potential buyers see the merchandise? (Or even know what it is?)

Things to take away from today’s post:

Your 401(k) is in more pies than you think.
You probably don’t know what those pies are.
Even with a little research, you’ll still only be able to identify a handful of the pies.

401(k)s themselves are a good idea for those eligible for them. The tax savings alone make them worthwhile, to say nothing of the employer matching. But if you’re relying on your employer’s mutual fund company representative to make financial decisions for you that could end up impacting you for decades, you need to take ownership.

*This isn’t necessarily bad news. The chances of picking the 4 worst-performing stocks on the NYSE are infinitesimally low – several quadrillion to one. But even if you did, with a balanced portfolio you’d only lose about 80% of your money. That’s not easy to do. We invite you to check those companies’ financials (easy to do, with the help of our e-book) and see if they aren’t among the best bargains on the board.

**This article is featured in the Yakezie Carnival: The Wonderful Wizard of Oz Edition**

Filed Under: Bad Examples, Education, Estate Planning, Finance Tagged With: 401(k), investment, mutual fund, retirement account

Financial Retard of the Month

Control Everything But Your Cash

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