Money Obedience

For most of the 20th century Americans stored their savings literally in their homes. Home ownership is the way most Americans accumulate wealth, and likely the largest divide between America’s have and have-nots can be seen when looking at those who own homes and those who do not. Home ownership is key to reaching financial goals. For example, many Americans borrow against the equity in their homes to finance their children’s higher educations, and in that way they help the next generation get a financial leg-up. With the rate of foreclosures now at such an extreme high, perhaps the wealth gap between homeowners and renters will be even greater after the economic dust settles than it was before. That is, those who held onto their homes in times like this might really turn out to be ahead of the game. Looked at from a sociological and historical perspective, maybe holding onto one’s home throughout this crisis is not such a bad idea. That is, if you can manage it!

I overheard two women talking on the uptown bus yesterday. One says to the other “It’s all those people who don’t know how to manage money why we’re in this mess. They spent and spent, bought houses they knew they couldn’t afford, and still can’t stop spending. They can’t begin managing debt – they never tried. Now look where we are.” The other says, “No, not everyone knew this would happen. And not everyone overextended themselves. Some people really thought they would be okay. And some people were okay and now are losing their jobs.” The first said, “Yes, but they should’ve seen this coming.”

As far as I know, the experts didn’t even see this coming. So how could the average Joe or Jane? My own experience tells me that lots of people who couldn’t imagine themselves in trouble are in trouble now. Look at me! My husband made way more than I do, and had 13 years at his firm. I am just now a few months into my second year on a new job. His job is lost, and now mine is the household staple. How could we see that coming? He was making money for the firm when he was let go! Also, we bought our house at a big fat discount (according to the market value of similar homes in our area at the time), and we put a heckuva lot of cash down so we could have a 30-year mortgage that we thought we might even be able to pay off in 15 years. If anything, one might say that we acted very conservatively given that markets (of both the stock and housing kind) were booming. Again, how could we see financial trouble coming? But we may very well run into trouble within a year, too.

Still, I’ll tell you, no matter what woman number two said to woman number one, she would not be convinced that those in financial trouble are to blame for their own condition. I suppose that there are many who think like that – that everyone in trouble deserves it. We like to think of our society as a meritocracy – that the have-nots and haves all get what they deserve. It would certainly make life easier to figure out if it was true. But reality is that the world just doesn’t operate so predictably. At times like these, average Joe or Jane has to figure out what to do next to stay afloat, or to just get by. We are doing the same.

Yes, my wife and I are still gung ho to accumulate wealth, even in this market. And yes, we have written about this in the past. (See for example the post entitled “Warren Buffet Makes Me Feel Better”) Today’s post is about the stock market’s crazy moves.

All of us are reading market analyses in the newspapers, on the internet, and in magazines, or hearing about the market on the radio or television. My wife and I, for the most part, shrug off the news. Why do we not make so much of the chatter about ups and downs? Well, for one we think that a lot of these comments are really off the cuff, but these moves aren’t all based on rationality, and times are uncertain, so we think that there really is no way to make sense of irrational thoughts. But commentators still try to do that because that is what they get paid for.

Let me give you an example what exactly I mean. On October 27th 2008 the US stock market dropped by a couple percent. According to commentators, the reason for the drop was the concern that the economic crisis was deepening. A day later this concern was confirmed when the consumer confidence index dropped to 38.0, much worse than the expected 52.0 and the lowest number on record. You would imagine that the stock market would take a serious beating since this should serve as confirmation that the worry that the economic crisis is deepening must be even greater than we thought. Not so. The market actually rallied a whopping 10.8%. And how do commentators explain this turn-around? They say that the market rallied because the evaluation of stocks is the cheapest in 23 years and because the money market is unfreezing. All of a sudden there is no more talk about a deepening economic crisis. That was yesterday. Nobody is worried about it today.

So, how do we make sense of the two reasons given – that is, the cheapest stock evaluation in 23 years and the unfreezing of the money market? Well, did we really need to wait 23 years for this cheap stock evaluation? What I’m saying is, why did the market not rally when we hit the cheapest evaluation in 20 years instead of 23? Or how about 22? It sounds to me like this number of 23 years is pretty random – it just happened to coincide with other things going on. The other reason given does not make much sense to me either. The money market isn’t just now unfreezing – it has been on the mend for over a week! So the analysts are saying that the stock market chose to ignore what was supposed to be good news… until October 28th? Was there some magic that the “unfreezing” was actually significant enough for us to respond to? To me, the 64,000 dollar question is this: What really happened on this day that the market “forgot” about a deepening crisis and all of a sudden focused on historically cheap evaluations and the unfreezing money market? And I must tell you, I cannot think of an answer. In my view, the random nature of what is going on is the most credible thing to look to, because I cannot see this being explained by rational reasoning.

That is the real reason my wife and I choose to ignore the commentators. We are going through some unusual economic times, and these times are marked by unusual movements in the stock market. That is all we need to know – we have no need to further explain or analyze the stock market’s moves. What does this all mean? My wife and I choose to stay firm with our retirement plan, and we choose to keep investing for our long-term goals. We don’t really care why smart commentators think the market gained or lost 10% on any given day – that won’t help us know any better what to do, really. We only care to work towards our financial goals, the biggest commitment being our retirement. Rather than planning for market ups and downs, we plan to enjoy our retirement in each other’s company. (Well, except for those golden days – which I hope are many – when I can sneak out for a run or a round of golf.)

The Sage of Omaha, Warren Buffet, has written in the New York Times that he is putting his own money into the market now. He oughtto know what he is talking about. He is the best investor alive, which happens also to have made him the richest man of the world. Aside from all that, he offers what sounds to me like a sound opinion that could also bring profits to the average investor. His comments made me feel better, that's for sure. As I have written in a recent blog and in part 2 my wife and I have decided to stick with our current investments and to keep making contributions to our 401k retirement plans. So, we have been following, if not anticipating, Buffet’s advice.

When investors are as frightened as they are now, there is a good chance that the sell-off in the stock market has run its course – at least for the time being. I believe the decline isn't even done yet, and still, I think it is a good idea to keep adding to one’s investments, and to keep making 401k contributions or regular payments to an IRA. I know that I am likely unable to catch the lowest prices during this market decline, but I also know that by adding money to my investments I will own some pretty cheap stocks in the long run. Sure, I'll own some expensive ones I acquired in previous purchases, but I'll also own a bunch of cheap ones. Does it make sense for me not to buy cheap when I already have bought them at the time when they were expensive?

Sure, things look pretty bad in the economy, and in the stock market, too. But it is not like every stock will go to zero. Some companies may go bankrupt and send their stock values to zero. To protect myself here, I buy index funds that put together many stocks. It would not matter all that much if a few of them went under, because a large majority of the stocks in an index fund will always have a value. And that value will rise when the economy turns around. That could be a year from now, two years from now, or even ten years from now. I'm neither clairvoyant nor smart enough to know when this turn-around will happen. I only know that as sure as an economy hits a recession once in a while, it will also expand again, at some point. We have been privileged enough to have lived in a time of extraordinary economic growth (during the last 20+ years). But let's take care not to be spoiled and unrealistic with our expectations. The economy, the stock market, and, well, life itself, all have their ups and downs. We have to be ready to face both the ups and the downs. In fact, I'd say that life's ups and downs are the things that add spice to our lives.

Along with others, GQ and Oprah magazines end up in our mailbox every month. My wife is a regular subscriber of Oprah Magazine, the half-inch thick, monthly "booklet" for women. It comes jam packed with lots of advertisements. I am an off-and-on-again subscriber of GQ magazine, the half-inch thick, monthly "booklet" for men, also with lots of advertisements. (I'm on again because I had to use some miles in a frequent flier program that were going to expire worthless. May as well get a free subscription to a magazine than let the miles expire, right?) Both magazines, by the way, include "articles" that read like very wordy ads, for what you should buy if you want to look good, rejuvenate, or otherwise stay in the game.

Even though my subscription was free, I am not so sure that subscribing was a good idea. ...especially when you are setting up a family budget (as we're about to do). I am not thinking of the subscription price of the magazine and how that impacts a budget. It's the content I'm worried about. GQ tells me every month what kind of fashion items are a must for a gentleman. There was a recent issue that talks about a particular leather jacket that belongs in every wardrobe. And no, the two (aged) leather jackets I have in my closet are not good enough (by the article's standard). I am supposed to have another one made of special washed leather, that fits with far greater shape than the loose-ish ones I own. And guess what? According to the article, the price for this type of jacket ranges from $450 to about $3,500 depending on the label. Yeah right. My family budget really needs such an expense.

So, when I was leafing through Oprah magazine I noticed a similar pattern. That magazine made me go through about 90 pages of advertisements before I got to the text of the actual magazine – similar to what you have to do with GQ. And when I finally got to the text, it started with the "O List – A few things we think are just great" – stuff that is cool or that a woman must own. Animal shaped pillows for $86, "wow" necklaces for up to $670, and a vase for $95. Now this list does not appear to be part of an ad campaign, this is just stuff that the editors of the magazine "recommend" to their readers. And, of course, it is more stuff that my family should buy. None of this is helpful to my family budget.

Again, these are not the only magazines coming to our door, so I don't mean to pick on these two alone. But it doesn't help that we constantly must - within the confines of our own home - resist these pressures to consume, to fit in with products, to be cool, to look young, and to be up-to-date constantly. It takes a person with a lot of self-discipline not to buy into these pressures, which can literally break the bank of a family budget, or the spirit of someone who is berating themselves for their inability to keep up with the Joneses. Fortunately my wife and I are doing pretty well in the self-discipline department. Sure, sometimes we give into the pressure, but mostly on low-priced items, and never on a $3500 leather jacket.