Uncommon Cents

There hasn’t been a ton made out of this (and some that is seems very political), but this past month Teresa Ghilarducci, professor at the New School of Social Research (I’ve never heard of either her or the school) testified before a House of Representatives subcommittee on not just eliminating preferential tax treatment of 401(k), 403(b), and similar plans, but her idea on having workers trade in those accounts for “guaranteed retirement accounts” which would have the government add $600 annually into it and pay about a 3% return with an adjustment for inflation.

This is possibly the worst financial idea since the 401(k) debit card.

I’m sorry, but the 401(k) and equivalent plans are some of the best things to ever happen to individual investors. They offer tax advantages and the ability for the investor to (at least in large part) manage their own money, many times with exceptionally low costs and great diversification. My 403(b) administrator is Vanguard and has a brokerage option, allowing me to invest in close to anything I want with very low costs.

If I wanted an annuity, I’d have gotten one.

If this one becomes law, maybe it’s time to think about moving overseas.

I’m not surprised to see so many people have a knee jerk reaction to the stock market troubles over the last few months. Just a year after hitting all time highs, the markets have lost close to 40% of their value. Many investors are getting out, or at least stopping new contributions.

Here’s why I don’t, and I wouldn’t suggest anyone else do so–

I’m Following My Plan: I don’t invest haphazardly. I have a plan. My plan includes the common buzz words that people use when talking about their plan: index funds, asset allocation, regular contributions, diversification, low expenses, Roth IRA, 403(b). It doesn’t take a lot of time to come up with the plan, but having one is incredibly important.

More important, of course, is following the plan. Just remember, however, that the whole reason you came up with the plan is for times like these–if your plan was sound, just go ahead and follow it. That’s why you have it!

As an aside, in times like these, asset allocation comes into focus as one of the most important parts of your plan. When you’re in your 20s and early 30s, having the vast majority of your money in stocks is fine, but as you get older, making sure you have a reasonable amount in bonds can provide your portfolio with ballast in difficult times.

My Plan is Based on Time Tested Investing Principles: Regular contributions. Asset allocation depending on age. Diversification. Low cost. Using whatever tax advantages I can. They’ve served me well over time (let me be clear: yes, my portfolio is considerably down for the year, but really, the whole market is down considerably for the year. However, since I’ve started investing seriously, every year before this year has been a positive result.) and I believe they’ll continue to serve me well over time, at least in part because they’ve served many, many other investors well over time, but more importantly, because of my personal history with it.

Selling Into a Huge Loss is a Loser’s Game: If I sold my stocks right now and moved into cash or bonds, that’s it; my chances of being part of a stock market recovery–and it has always recovered–are zero. I’ll have locked in my losses forever.

Even Recent History Backs My Position: Does anyone remember the bear market that happened earlier this decade when the dot com bubble burst? Yes, it was tough, and it was painful–this was in 2000. And yet, a few years later, the stock market was higher than when it burst. Let’s not forget: 2007 marked an all time high for the major indices; the market doesn’t just go up and up and up. Even though in the short term the market decline was painful, I’m way better off even now than I was then, and I was even better off a year ago. I fully believe I’ll be even better far before I’m ready to retire.

Yes, there’s been a lot of stock market chaos the last few weeks, but I’m not planning on doing anything that wasn’t in my plan in the first place. I’m here for the long term!

This is being written the night of Wednesday, October 1, 2008.

Just a few days ago the House of Representativest rejected the $700 billion bailout package which almost every personal finance blogger I’ve read opposes. It actually was a nice demonstration of the power of the people in politics, as apparently the switchboards were overloaded with objectors–of course, the impending elections in a hair over a month make the politicians very aware that their constituents are their bosses.

Of course, it ain’t over until it’s over, and I (among many others) was sure that the bill would somehow get through, just hopefully with a lower price tag.

What’s passed as of now from the Senate is still at $700 billion bailout package, but with some changes to hopefully make it more palatable to the House.

Come on, people! The big issue is not these changes; the big issue is the dollar amount! We can’t afford a $700 billion dollar bailout package, it’s that simple. Find a way to do it with less, or forget about it and go in another direction.

…I’d tell them to stop acquiring new debt. Right now.

I’d tell them that there were things they wanted to buy that they couldn’t afford–like $700 billion of bailout money and Medicare Part D (well, too late on that last one).

I’d tell them they need to figure out where their money’s coming from and where their money’s going and to figure out how to spend less–by making difficult decisions and sacrifices–and how to increase income–even if it means increasing taxes.

I’d tell them to get started on an emergency fund for rainy days–like the rain that’s coming down right now!

I’d tell them to figure out where their worst debts are and to put the majority of their money there; to consider snowballing their debts or to pay off the highest interest rates first, but to have a strategy of some type to effectively pay their debts, including refinancing them if necessary.

And I’d tell them this was not going to be easy; it was going to be difficult, it was going to take a long time, and everyone in their family would need to sacrifice, but in the end, it would be well worth it.

Funny how if the businesses and individuals who got this financial fiasco going in the first place had done their personal finance homework in the first place… there wouldn’t be a financial fiasco going on.

Well, sadly, no, not funny.

That’s what blogger James Wesley Rawles is calling it, and so far, it really is the Mother of All Bailouts. We are talking about an amount that’s approaching a trillion dollars to bail out investment houses, banks, insurance companies, mortgage companies… almost all of it stemming from the irresponsible housing lending practices in the real estate boom a few years back.

There are multiple problems with all of this, including setting a precedent (what makes anyone think the automakers or the airlines aren’t going to be looking for a bailout too?) and that it adds to our national debt, but the big problem is the same one we talked about the other day: these are your dollars!

If you were one of the many responsible homebuyers who saved for a down payment and got a reasonable mortgage that you could afford, do you think that your tax dollars–the additional tax dollars that you will have to pay for this bailout above and beyond what you were already likely to pay–are best spent bailing out those who didn’t, and the mortgages that were created by those homebuyers as well?

Where does it end?

Remember, these crises are relatively new; Washington hasn’t addressed Social Security yet (although the rumors of the coming death of Social Security have been exaggerated) or the problem they don’t want to talk about that is four times the problem of Social Security: Medicare.

How many bailouts can the taxpayer afford? My guess is that we’re not done yet, although I’d like us to be!

At least that’s the case if you’re a taxpayer in America. Government dollars aren’t separate from taxpayer dollars–they -are- taxpayer dollars! Don’t forget that when you see the government bailing out Fannie Mae… and Freddie Mac… and whatever bank it is this week. And when they’re also bailing out Ford or GM or the airline industry or anyone else in the future, those are also taxpayer dollars, which are your dollars.

Every dollar that’s spent on helping out a company is coming out of your paycheck, whether it’s paid back (more likely in some cases than others) or not, and that’s on top of all the money the government–meaning the taxpayers–already owe.

Personally, I’m not opposed to paying taxes; I just wish they would make good use of it. At least some of these don’t seem to fall into my idea of “good use”.

The Federal National Mortgage Association, known by its initials FNMA which are pronounced “Fannie Mae”, is a former government agency that is now a publicly held corporation and government sponsored enterprise. Fannie Mae is the leader in the United States secondary mortgage market; between it and Freddie Mac (the Federal Home Loan Mortgage Corporation) they either guarantee or own approximately one half of the mortgage market in the U.S., an amount estimated to be about $6 trillion. Fannie Mae’s government charter directs it to make it possible for Americans who are not among the highest wage owners to buy homes.

The subprime mortgage crisis has taken a huge toll on Fannie Mae; its 52 week high on the New York Stock Exchange is $70.57. Currently it is trading at just $6.15, meaning that it has lost more than 91% of its value within the past 52 weeks and is dangerously approaching penny stock territory. Unlike the Government National Mortgage Association (GNMA, also known as “Ginnie Mae”) which is directly backed by the federal government, neither Fannie Mae nor Freddie Mac have a guarantee from the government, instead having implied backing from Washington, D.C.

It is not believed that the government will allow Fannie Mae or Freddie Mac to fold, meaning another taxpayer bailout is a possibility. Concern over the difficulties faced by the two corporations continues to drive their stock prices down and weigh on the entire market.

My stimulus payment arrived this past week. I am not sure why it came in the form of a check rather than direct deposit when I filled out my bank information on my 1040A to have the money deposited directly into my checking account, but whatever. I can live better with $600 than I can live without it.

What to do with that money? It immediately helped replenish some of the funds used to get this MacBook that went from the want to need list as quickly as my sister’s dog pulled my iBook from the table to the floor. With that payment and my previous snowflaking efforts, I’m most, but not all of the way back to recovered.

What are other people doing with their stimulus payments? Much to my dismay, many of my friends are using them for spending rather than saving or investing. Even some people I know who are clearly struggling financially are immediately using the money to buy iPods or iPhones or other luxury items.

Now, as an Apple stockholder, I’m not opposed to people spending money on their products, and yes, the intent is for the money to be spent rather than saved–at least that’s what the government is intending. But money doesn’t have to be spent if it’s better for your situation to save it, and that’s what I’ve done with mine.

What are you doing with your stimulus?

I received a note from the State Tax Collector in the mail.

“Uh oh.”

The letter stated in a rather straightforward matter that I had miscaclulated and underpaid on my taxes. I immediately got out my photocopy of my 2007 taxes and discovered that yes, indeed, I had made an error. I had taken the amount I owed from a column one too far to the left while looking it up in the tax table, meaning I underpaid my taxes by $83.

Moreover, I owed a bit of interest and a penalty due to the underpayment. A statement would be forthcoming (it came about a week later), so my total owed was approximately $100.

A $17 lesson.

Next time I work on my own taxes–and I have a hard time seeing myself not working on my own taxes, even when they are a bit more complicated–I need to triple check them. That’s the lesson–we learn through mistakes, and the difference between a beginner and a master is 10,000 mistakes. There’s one of them.

The silver lining is that I can charge the amount owed online, which will get me a little back (1.25%) and let me get a little more time to come up with the cash. And hopefully, I’ve learned my lesson.

May seems to have been another positive month in the stock market; my initial belief just looking at (but not actually running) the numbers is that it was not quite as positive of April but it was quite decent in and of itself. Let’s take a closer look:

The Vanguard Total Stock Market Index Fund (VTSMX), which makes up the largest portion of my portfolio, ended May at $34.16 a share after closing April at $33.46, a gain of a bit over 2%. The Vanguard Total Bond Market Index Fund (VBMFX) closed May at $10.07 vs. $10.18 at the end of April, down just over a percent but putting out that nice 4.86% yield for the fixed income portion of your portfolio. Finally, the T. Rowe Price International Discovery Fund (PRIDX) finished May at $46.23 versus the $45.28 it finished April at, a nearly identical gain of a bit over 2% to VTSMX.

Hopefully, the market continues to stay on course for a positive end to 2008!