Feelin' Shaky? Then Lay Off the Media and the Caffeine!

William Bernstein, financial theorist and author of The Four Pillars of Investing, said it best in a CNN Money website article, "Calming Words for Troubled Times":

"Get out of the market? Of course not, silly. If you think about it logically, you are rewarded for owning stocks precisely because they are risky; the dicier things look, the more money you can expect to make in the long run...History bears this out: The lowest returns were earned by buying high when there was a lot of blue sky - think 1928, 1969, 1999. And the best returns were earned by buying low in 1932, 1942 and 1982, when it looked like the whole world was going to hell. One more thing: Stop watching CNBC. It will make you stupid and poor. If you must watch, turn off the sound. It becomes an excellent substitute for Animal Planet."

A LMF4HMW reader surely doesn't lose the irony between his "calming words" and the title of the piece still promoting the idea of "troubled times". The main point of my article today is to calm your fears. The sky is not falling. We do not need more government intervention. And volatile markets are normal.

Let's face it -- the sensationalism addicted media is bored right now. Calm, positive news just doesn't sell stories. We've had to put up with political coverage for the 2008 election since about 2006, so even the talking heads are getting sick of it. There is some success in Iraq given the troop surge (although you won't hear much about it given the agenda), and there haven't been any lacrosse "scandals" (the real scandal was the media's biased treatment of the issue) of late. So when you've got to sell ad space -- i.e.: FREAK OUT about something, it might as well be the economy!

In one of my first posts, I talked about putting together a long-term financial plan. Successful investing is not about derailing your efforts because you heard some bad news or have an icky "feeling". Just as a rock hard body is crafted by shunning impromptu scoops of Rocky Road in favor of your training plan, a strong portfolio is made by adhering to your strategy.

So instead of being glued to the tube or "news"paper in awe of all the ills of the financial markets, take some advice from mother, who always knows best: "Turn off that television! Go play outside!"

A Letter to my Econ Prof. Just in Time for Tax Season

Dear Professor XYZ,

I have something I need to confess: I didn't really understand what you were talking about ten years ago when I sat in your Macroeconomics class and you said, "One dollar today is worth more than one dollar tomorrow." And worse yet, I didn't give a hoot about economics -- a friend told me you were a great prof, that it was good material, and that she'd help me (thanks, Liz!) so I signed up.

Of course, now I wish I'd been able to fully grasp the course content. I tried -- you had a photographic memory and would've noticed if I'd skipped class even one class. I studied hard, too. I think I received a B (you'd surely remember), but the material just didn't completely click. The main problem was that I had no real world experience with which to compare the concepts you presented. So I had to go and spend $40k to get an MBA with a finance concentration and literally force feed finance into my brain.

Now that I know more, I really appreciate what you were trying to do. All those graphs and charts with supply and demand make sense now; I get it! The only problem is, most people walking around (and voting... grr) don't, but I digress.

Please find below my blog on Time Value of Money, which is dedicated to you. (Just sorry I can't remember your name, especially since I know you'd remember mine.)

Yours,
LMF4HMW blogger

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Perhaps you've heard it to: "One dollar today is worth more than a dollar tomorrow." OK, sounds reasonable -- I'd rather have a buck today than tomorrow. I'd rather get paid today than tomorrow. (I'd rather buy the Brunello today... oops, not really, that would put me in the hole $100 :) Do you really understand the concept? And more importantly, why you should care?

The concept, Time Value of Money, is a basic premise of modern finance. In asserting that today's dollar is worth more than tomorrow's, we're making a valid estimate that by having the money today, we could accrue interest until tomorrow, next year, etc. It is an important concept because it affects the way you operate financially. We all know we want to pay lower interest rates on loans, and that we'd prefer a savings account or investment with a higher interest rate. This is also due to Time Value of Money.

In honor of tax season, let's examine a hypothetical duo of Janes and their differing approaches to paying taxes as an example:

Note: Jane is a single woman.

Jane Doe - like many of us, she wrote "1" (self) on her withholding form some time ago. She received a $2000 tax refund and is happy about it! Thrilled, actually, as Ms. Doe figures she would've "spent it anyway" and is glad to use it to pay down $1500 in credit card debt and treat herself with the rest.

Jane Duh - Ms. Duh set her exemptions appropriately when she started her job a few years back and knows she'll need to adjust them when she buys a condo in the next few months given the mortgage interest rate deduction. She's only expecting a minimal refund check, and is also thrilled.

Which Jane should be feeling thrilled right now? Hint: "Ms. Duh" ain't no dummy.

Confused? What's wrong with getting a fat refund?!! It's like finding $20 in your pocket, but better, right? NO. Why? Time Value of Money: Ms. Doe unknowingly gave Uncle Sam a $2000 interest-free loan in 2007. If she'd invested it like Ms. Duh in a money market account offering 5% interest, she'd have $2100 right now. The object of the game is not to overpay.

Note that it's unrealistic to assume that you'll net out at zero. Ms. Duh's "perfect score" of owing nothing and receiving nothing is for illustrative purposes only. What's important is that you examine your withholdings to get them to the point where you will either receive a minimal refund or even owe Uncle Sam a few bucks. Better him giving you an interest-free loan, right?

PS - what goes better than milk with Uncle Sam cake? Prosecco! It's affordable, light, sparkles and can handle a bit of sweetness.