Financial Literacy 101: Your most important investing decision

Ninth in a series for
Financial Literacy Month

April is National Financial Literacy Month — and at SMI we've been doing our part with a series of posts on basic principles of investing and personal finance. (Each post in the series is identified by the orange character at right, diligently working on his financial plan.)

Here's our final post in this series, with advice on the one investing decision that will have greatest impact on your eventual returns.

What determines the performance of your investment portfolio more than any other single factor? Many investors think it's the specific investments they choose. Certainly that can make a big difference.

But even more important is how much of your portfolio is allocated to stock-type investments and how much to fixed-income securities such as bonds. Academic studies over the years have established that as much as 90% of your long-term results can be traced to this fundamental allocation decision.

A portfolio's stock-to-bond mix does more than dramatically influence future returns — it also tells you how those results are likely to be obtained. Look at these charts. The vertical lines represent the returns for each calendar year between 1926 and 2008, ranked from worst to best.

Starting with Chart A, you can see that a 100% stock portfolio is going to provide many years of big moves, both up and down.

The other charts reduce the stock portion in increments of 20% each, putting that money into intermediate-term government bonds instead. This has the clear effect of narrowing the range of results. Not only are the bars on the other graphs smaller (illustrating that the gains and losses of these portfolios are less extreme), but the frequency of negative returns declines as well.

The 100% stock portfolio suffered losses in 29% of the years, compared to just 10% of the years for the 20% stock portfolio.

It's safe to say then, that the more bonds in your portfolio, the smoother the ride. By contrast, the higher your stock allocation, the more you can expect returns to come in a "two steps forward, one step back" fashion.

If owning stocks subjects you to greater swings in performance and produces losses more frequently, why use them at all? Because that's where the biggest long-term gains are! The net effect of all those stock market ups and downs is greater overall returns, which you can see in the average annual returns shown on the charts.

So, on the one hand, we have stocks, which are volatile but produce high returns. On the other we have bonds, which are relatively stable but produce lower returns. How should you go about combining them in a portfolio?

The key ingredient in this recipe is time. Over shorter periods, stock returns are much more variable. Maybe you'll do great; maybe you'll do poorly. Given a long time frame, however, you can be quite confident that stocks will provide higher returns than bonds.

Here's a good example to illustrate this point. Think about tossing a coin. You know that the probability of getting heads on any single toss is 50%. So if your goal is to get 50% heads, then what matters most to you is having a lot of tosses. If there are only going to be two tosses, you should be much less confident of getting 50% heads than if there are going to be ten tosses. With 100 or 1,000 tosses, your confidence should grow correspondingly that the long-term averages will emerge.

So it is with investing. The more years ("tosses") you have ahead of you to invest, the more confident you can be that you'll benefit from the higher average returns stocks have historically provided. The fewer years you have to invest, the more you need to protect against the possibility that the results over your shorter time period may not match the long-term averages.

That's why it's generally recommended that younger investors take advantage of the many "tosses" in their future by investing heavily in stocks. They can afford to ignore the short-term ups and downs, while focusing on the highest long-term returns possible. Later, as you move closer to retirement and the number of future tosses declines, it's prudent to scale back the short-term risk of loss by gradually increasing the percentage of bonds held in the portfolio.

SMI's Financial Literacy 101 series

• Creating your own personal financial plan
• Save by paying yourself first
• Where to put your savings
• How much should you save for emergencies?
• The upside of index funds
• A simple and steady investing strategy
• Inside-out investing
• Making the 'right' investing decisions
• Your most important investing decision

Posted by Joseph at 10:55 AM | TrackBack
Category(s): Investing Principles

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Health-care overhaul hits HSAs hard

There are few, if any, health insurance products that won't be affected by the recent health-care legislation. At Sound Mind Investing, we are on Health Saving Accounts (HSA) and were recently notified of some changes coming as early as next year:

Qualified Medical Expenses: Starting January 1, 2011 you will no longer be able to pay for over-the-counter medications from your HSA as a qualified medical expense. Until the end of this year, you can reimburse yourself or pay from your HSA the money used to buy over-the counter medications. The new law removes over-the-counter drugs not prescribed by a physician from being paid from an HSA, FSA, or HRA on a tax-free basis.

Non-qualified expense penalty: Under the new law, if you use your HSA funds for nonqualified expenses, you will face a higher penalty. The tax penalty for non-qualified HSA distributions will increase, effective January 1, 2011, from 10% to 20%.

And that's just the beginning. Coming in 2014 will be mandated minimum coverage, preventive-care service changes, and small-employer benefit requirements — all of which will likely bring changes to HSAs, if not altogether eliminate some of the HSA products being sold.

Even more changes are scheduled for 2018.

For details, see Healthcare Reform and HSAs (PDF) from HSA Bank.

Posted by Matthew at 2:25 PM | TrackBack
Category(s): Health Care
Tag(s): health care, HSA, insurance

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401(k) plans changing their tune?

For years, my impression has been that former employers are generally happy enough to see you transfer your 401(k) balance to an IRA (particularly if the balance isn't very large). Indeed, some plans even force former employees to move their balance within a certain amount of time.

That "move 'em out" mindset appears to be changing. With the retirement of the boomer wave of workers, many of these plans appear on course to shrink in the coming years, and 401(k) plan providers don't like that.

Naturally, IRA providers — which include both brokers (Schwab, Fidelity, TD Ameritrade) and mutual fund companies (Vanguard, tons of others) — have aggressively targeted these assets for years. Only recently have 401(k) providers started fighting back.

IRAs offer a lot more flexibility than most 401(k) plans, which is why SMI has always leaned toward retirees rolling 401(k) assets into an IRA — especially for investors who want to follow our highly successful Fund Upgrading strategy.

Naturally there are a few exceptions that would give the nod to 401(k)s instead, such as:

• If you're an indexing fan and have great low-cost index fund options available in your 401(k);
• If you are between ages 55-59;
• If you have company stock held in your plan.

In other words, it pays to look closely at the details of your specific situation. But unless you have a specific reason to stay, we think most retirement investors are best served by rolling any old 401(k) accounts to IRAs.

Posted by Mark at 9:10 AM | TrackBack
Category(s): Retirement
Tag(s): retirement

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Financial Literacy 101: Making the 'right' investing decisions

Eighth in a series for
Financial Literacy Month

At Sound Mind Investing, we're doing our part for National Financial Literacy Month by featuring a series of posts on basic principles of investing and personal finance.

Here's post eight — on how to make investing decisions with confidence.

Having seen a horrendous bear market in 2008 (and early '09) and now a sharp run up over the past 14 months, many people are finding it difficult to know the "right" steps to take going forward. They wonder:

"Is this a bad time to buy stocks, since the market has already risen so strongly?"

"If I move from one kind of investment to another, will I actually be better off?"

"How much of my retirement money should I put in stocks versus bonds?"

It's important to keep in mind that since you can't know the future with certainty, your investment portfolio will never be perfectly positioned to profit from upcoming events. In retrospect, it is always possible to think of ways you could have made more money (or lost less) than you did.

The human inability to make fully accurate predictions means it's pointless to think of the "right" investment portfolio simply in terms of making the highest possible profit. If that's your approach, you will always be second-guessing your decisions, and you'll end up frustrated and disappointed.

Instead, the "right" portfolio is one that realistically faces where you are right now, looks years ahead to where you want to go, and has a very high probability of getting you there on time.

Let me describe a few characteristics of the "right" steps to take:

The right investing decision is one consistent with a specific, biblically sound long-term strategy you've adopted. I have discovered a common trait among many people I counsel: their current portfolio is simply a random collection of "good deals" and assorted savings accounts. Each investment appears to have been made on its own merits, without much thought of how it fit into the whole.

Their portfolios tend to be an incongruous collection of savings accounts (because the bank was offering a "good deal" on money market accounts), a savings bond for the kids' education (because they read an article that said they were a "good deal" for college), a universal life policy (because their insurance agent said it was a "good deal" for someone their age), and 100 shares of XYZ stock (because their best friend let them in on this really "good deal").

Those who hold this kind of random assortment of "good deal" investments are what I call responders (i.e., reacting to sales calls, making decisions on a case-by-case basis). I urge you instead to become an initiator (i.e., one who develops an individual investing strategy tailored to your personal temperament and goals).

The right step is the purchase of an investment that you seek out purposefully, knowing where it fits into the overall scheme of things.

The right investing decision is one you have taken time to pray over, and about which you have sought experienced Christian counsel. Because your decisions have long-term implications, you should take all the time you need to become informed. Don't be in a hurry; there's no deadline.

You need time to pray, ask for the counsel of others, and reflect. You should consider the alternatives, examine your motives, and continue praying until you have peace in the matter. If you're married, you should pray with your spouse and talk it out until you reach mutual agreement. Remember, you're in this together.

The right investing decision is one you understand. It's not likely that your situation requires exotic or complicated strategies.

In fact, the single investment decision of greatest importance is actually quite easy to understand. It is simply deciding what percentage of your investments to put in stocks (where your return is uncertain) as opposed to bonds and other fixed-income investments (where your return is relatively certain). This one decision has more influence on your investment results than any other.

Another aspect of understanding your investments is to educate yourself on the basics. The right investment step is the one where you understand what you're doing, why you're doing it, and how you expect it to improve matters.

The right investing decision is one that is prudent under the circumstances. Does it pass the "common sense" test? How much of your investing capital can you afford to lose and still have a realistic chance of meeting your financial goals? Investments that offer higher potential returns also carry greater risks of loss.

The right investment step is the one that protects you in the event of life's occasional worst-case scenarios. Generally, this moves you in the direction of increased diversification.

I realize many people find investing to be a nerve-racking, if not downright scary, experience — and the turmoil of 2008 certainly didn't calm any nerves. Unfortunately, anxiety and the fear of doing the "wrong" thing cause many people to "freeze up." They become frightened into inaction. In mail from readers, we get many variations of these three comments:

"There's so much at stake. I'm afraid I'll make the wrong decision."

"I don't have much experience. I'm afraid I'll make the wrong decision."

"My savings aren't making enough now, but if I make a change I'm afraid I'll make the wrong decision."

What is the "wrong" decision, anyway? If you think a wrong investing decision is like saying 2+2=5, then you're off track; such thinking implies that investing decisions can be made with mathematical certainty. They can't.

It's not that the economy and investment markets are completely random — they aren't. But investing deals with probabilities, not with certainties and predictable events. We can know some things but not others.

All of this is actually good news. It means anybody can play. It's like learning to drive a car. After a couple of lessons, you know enough to travel around town if you follow a few basic safety guidelines. After all, you're not trying to qualify for the Indy 500 — you just want to reach your destination.

In the same way, once you understand certain core concepts (such as those taught in our Sound Mind Investing Handbook and monthly newsletter), you're fairly well equipped to make basic investing decisions — and to do the thing that's "right" for you.

Adapted from chapter 20 of The Sound Mind Investing Handbook (5th ed.) by Austin Pryor. Copyright © 2008 by Austin Pryor.

SMI's Financial Literacy 101 series

• Creating your own personal financial plan
• Save by paying yourself first
• Where to put your savings
• How much should you save for emergencies?
• The upside of index funds
• A simple and steady investing strategy
• Inside-out investing
• Making the 'right' investing decisions
• Your most important investing decision

Posted by Joseph at 9:00 AM | TrackBack
Category(s): Investing Principles

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Harmful rule changes ahead for Education Savings Accounts?

One irritating thing about taxes — and anything related to taxes — is that the rules change with annoying frequency.

Case in point: several changes are likely to be forthcoming at year's end for tax-favored Coverdell Education Savings Accounts (ESAs). Certain provisions enacted by a Republican-led Congress in 2001 are set to expire, and at this point the current Congress doesn't seem inclined to renew them.

Although Coverdells have been overshadowed by state-sponsored "529" plans, they actually offer more investment flexibility than 529s, giving parents greater choice in where their money is invested. In addition, ESAs (unlike 529s) can be used not only for college expenses, but also to help pay qualified education expenses at the elementary, middle school, and high school levels. That's a great benefit for parents with children in private schools, as well as for parents paying for academic tutoring or extended-day programs.

Unfortunately, the "pre-college" aspect of ESAs seems likely to be on the way out. Moreover, contribution ceilings for Coverdell accounts, already not very high, could be sharply reduced.

Details from the Wall Street Journal:

[F]amilies planning to use a Coverdell account to pay for pre-college education expenses should think twice about opening or contributing to an account this year. Starting next year, withdrawals from Coverdells to pay expenses from kindergarten through 12th grade will no longer be tax-free, unless Congress acts to extend that benefit, which is not a sure thing.

Another prospective rule change would lower the limit on annual contributions to $500 starting next year, making Coverdells less useful for college savings. Already, the $2,000 limit has made Coverdells much less popular than 529 college-savings plans, which offer similar tax benefits for college costs and [have no federally imposed contribution limit]....

[Right now, i]nvestors can claim a Hope or Lifetime Learning tax credit for education in the same year they use Coverdell funds, as long as the tax credit and Coverdell money aren't used for the same expense. For example, an investor can take a tax credit for tuition in the same year he is using Coverdell money for books.... This is another benefit that could expire at year's end; the two tax benefits could become mutually exclusive.

The WSJ reports that Sen. Charles Grassley (R-Iowa) has introduced legislation that to preserve the pre-college benefit of Coverdell ESAs and keep the annual contribution cap from falling. But Joe Hurley, founder of SavingForCollege.com, is skeptical that Sen. Grassley's legislation will see the light of day — in part because many lawmakers don't like the idea of Coverdell accounts being used to pay for private school at the elementary and secondary level.

Mr. Hurley suggests either spending Coverdell accounts on K-12 expenses before the end of the year, or just accepting that the funds will have to go to college expenses later. He also points out that investors can move funds in Coverdell accounts to 529 accounts without triggering tax penalties.

That might make sense if the rules expire that currently allow people to use Coverdell funds and claim Hope or Lifetime Learning credits in the same year. Investors in 529 accounts have that same right, and [right now at least] it isn't at risk of changing.

Posted by Joseph at 9:29 AM | TrackBack
Category(s): College, Family Finances

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Financial Literacy 101: Inside-out investing

Seventh in a series for
Financial Literacy Month

April is National Financial Literacy Month. So this month we're featuring a series of posts on basic principles/strategies related to investing and personal finance.

Here's post seven — about a counterintuitive approach to becoming a successful long-term investor.

This may sound strange at first, but it's best to make your investing decisions with little regard for what's going on in the investment markets. No kidding.

Think about this: Where do investment decisions originate for many investors? The starting point is found in the impersonal "outside" world of current events, magazine articles, and brokers' recommendations. Their decisions are guided primarily by outside considerations. As they respond to the data thrown at them — sometimes buying, sometimes selling — their personal "inside" financial worlds take shape.

Their thinking is "outside-in." They need a continual stream of outside information to stimulate their thinking and provoke them to action. Decision-making would be impossible without it.

For other investors, the starting point of decision-making is "inside" information. The focus is on their own financial needs and a personalized long-term strategy designed to meet those needs. Their buy/sell decisions are made based on what's required to make sure their financial holdings are in accord with the game plan. The "outside" world of investment professionals comes into the picture only because assistance is needed in executing decisions already made.

This is "inside-out" thinking, where decisions are primarily shaped by inside considerations. Thus, current market fads, trends and so-called expert opinions are largely irrelevant to inside-out investors.

As you have probably guessed by now, we're encouraging you to be an inside-out thinker. In other words, make your investing decisions as you would other consumer purchasing decisions.

For example, if your family has grown to the point you need a minivan to haul everyone around, you wouldn't buy a sporty new Camaro SS instead because a magazine article said they're "hot" at the moment. Or, if you need a medicine that lowers your blood pressure, you wouldn't let a glowing recommendation from your druggist convince you to bring home the leading antihistamine for allergies instead.

This is obvious, you say. Yet many people have a difficult time applying this consumer mindset to their investing decisions, even though they should.

Here are a few of the questions an inside-out investor should be asking:

• Is my financial foundation rock solid — that is, am I debt-free and is my contingency fund sufficient?
• Am I overly invested in one sector of the economy or in a single stock, or are my investments well diversified?
• Am I meeting my giving goals?

Notice that the focus is on personal needs and circumstances, not on the headlines of the day (which almost never tell you anything that will enhance the quality of your decision-making).

Current events — whether good or bad — may prompt you to run through your personal list of review questions, but if you want to be a successful long-term investor, the news of the day should not dictate your answers.

To learn more keys to long-term investing success, read The Sound Mind Investing Handbook (5th ed.) by Austin Pryor. Copyright © 2008 by Austin Pryor.

SMI's Financial Literacy 101 series

• Creating your own personal financial plan
• Save by paying yourself first
• Where to put your savings
• How much should you save for emergencies?
• The upside of index funds
• A simple and steady investing strategy
• Inside-out investing
• Making the 'right' investing decisions
• Your most important investing decision

Posted by Joseph at 8:55 AM | TrackBack
Category(s): Investing Principles

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Hot off the server: The May issue of Sound Mind Investing

The latest issue of Sound Mind Investing has just been posted — and, of course, we've included some free-access content for folks who aren't yet subscribers. Check out On the Outside Looking In? — Austin Pryor's thoughts on what do to if you bailed out during the fear-filled days of the bear market and have missed the remarkable stock market recovery of the past year a so.

Also in the May issue:

• Why you may want to think twice before moving your money-market savings to a bond fund in an attempt to earn a higher yield;
• Advice on planning a wonderful and affordable wedding; and
• An excerpt from the classic book, Your Work Matters to God.

Not an SMI web member yet? Today's a great day to join and instantly gain access to all of the helpful and encouraging content in the new May issue!

Posted by Joseph at 4:40 PM | TrackBack
Category(s): SMI General Announcements

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Financial Literacy 101: A simple and steady investing strategy

Sixth in a series for
Financial Literacy Month

At Sound Mind Investing, we're participating in National Financial Literacy Month by posting a series of articles covering basic principles/strategies related to investing and personal finance.

Here's post six — about an investing strategy that is easy to understand and implement.

A consistent theme of the Sound Mind Investing philosophy is the importance of taking charge of your own financial future by becoming an "initiator" rather than a "responder." Initiators take action based on specific guidelines that flow from a specific strategy. Initiators, as the old saying goes, "plan their work and work their plan."

At SMI, we like "formula" strategies. A formula strategy requires you to make your buying and selling decisions based solely on mechanical guidelines. There is no judgment involved; it's all automatic. Such strategies protect you against your own emotions and the tendency to go along with the crowd.

Probably the best-known formula strategy is dollar-cost-averaging (DCA). It's not complicated. It's not time-consuming. In fact, nothing could be simpler.

Here's all you do: (1) invest the same amount of money (2) at regular time intervals. That's it.

The amount and frequency are up to you. The important thing is to pick an amount you can stick with faithfully over many years.

Your constant dollar investment automatically results in buying more shares when prices fall and buying fewer shares when prices rise. In effect, you are buying more at bargain prices and relatively little at what might be considered high prices. (Of course, only when you look back years from now will you know when prices really were bargains and when prices were too high.)

The beauty of DCA is that it frees you from the worry of whether you're buying stocks at the "wrong" time.

It is critically important to ignore all market fluctuations when employing a dollar-cost-averaging strategy. Most investors who obtain poor returns in the market are victims of their own emotions. Only after stock prices have risen sharply do they work up enough courage to buy stock fund shares. And they often sell when they become fearful after prices have plunged. The consequence is that they buy high and sell low, the very opposite of their goal.

It is important, then, not to let your emotions control you. You must exercise the discipline of maintaining your systematic investment program.

The benefits of DCA can be illustrated with a simple example. Let’s assume you can afford to invest $100 every month in your stock fund program. At the time of your first new investment, the fund shares sell for $10.

The next month, the market soars and you pay $14 for your shares. Finally, the third month the market falls back, and your fund retreats to $12, midway between your two buying levels.

Ordinarily, that would put you at break-even. But look at what has happened. The first month you were able to buy ten shares at $10 per share. The second month you acquired only 7.1429 shares at $14 per share. Now, at $12 each, your 17.1429 shares are worth $205.71. Instead at being at break-even, you have a small profit.

One caution: DCA does not protect you against losses. While it does result in your average cost per share being lower than the average price of the shares over time, in a bear market you can nevertheless have temporary losses.

In summary, dollar-cost-averaging is the systematic investing of a fixed amount of money on a regular basis, usually monthly. DCA eliminates the need to ask the question, "Is this a good time to buy stocks?" As far as DCA investors are concerned, every month is a good month.

Adapted from chapter 19 ("Systematic Investing") of The Sound Mind Investing Handbook (5th ed.) by Austin Pryor. Copyright © 2008 by Austin Pryor.

SMI's Financial Literacy 101 series

• Creating your own personal financial plan
• Save by paying yourself first
• Where to put your savings
• How much should you save for emergencies?
• The upside of index funds
• A simple and steady investing strategy
• Inside-out investing
• Making the 'right' investing decisions
• Your most important investing decision

Posted by Joseph at 9:05 AM | TrackBack
Category(s): Investing Principles

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The difference between saving and hoarding

A few weeks ago, I applauded the work ethic of the lowly ant — how it prepares for the future, storing up provisions for a later time. The Bible twice mentions the ant as an example of working hard to prepare for the future (Proverbs 6:6-8 and Proverbs 30:25).

But as Campus Crusade for Christ founder Bill Bright used to say, "Your biggest strength can be your biggest weakness." And believe it or not, this can be true of focusing on the future. You can over-do it and end up not enjoying life today.

Do you know someone who counts the cost of everything (ahem!... not that you could ever be one of those people)? I know people like that, and I believe their hearts are in the right place in that they're trying to be good stewards of God's money. But they can also zap some fun out of life. How?

• By guilting you with a barrage of questions about what you paid for something;
• By mooching off of you because they don't want the expense of paying for something themselves;
• By denying themselves a side of sour cream for their Burrito Inferno because of the 35-cent upcharge.

Ecclesiastes 5:12 says, "... the abundance of a rich man permits him no sleep." Is that because he's too busy worrying about his wealth? Verse 13 goes on to say, "I have seen a grievous evil under the sun: wealth hoarded to the harm of its owner."

Let's be clear here, the term "rich man" was used to describe a faithless person whose identity was tied to his wealth. But you can see how hoarding could easily prevent someone from the blessing of being generous, which in my book, falls in the "harm of its owner" category.

Not surprisingly, Scripture offers a solution for the hoarder. 1 Timothy 6:17 begins this way:

Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain...

If our confidence and security are in our bank account, we'll never be satisfied. (This same sentiment is in Ecclesiastes 5:10). People whose hope is in money are never satisfied; they live uneasy and restless lives.

The middle part of 1 Timothy 6:17 says, "...but to put their hope in God..." Whenever our hope is in something other than God, we'll inevitably be disappointed. So in that sense, money is no different than power, looks, status, IQ, athleticism, job, fame, and so on.

But my favorite part of the verse is the last part, when it concludes:

"...who richly provides us with everything for our enjoyment."

Wow! How liberating, especially for the hoarder. God wants you and me to enjoy whatever material blessings He's given us, whether big or small. This isn't to say that we should ignore the principles of the ant. And it certainly doesn't negate the need to give God the first fruits and to manage wisely what He's entrusted to us. In fact, this verse alone makes me want to increase my giving and improve my stewardship, if for no other reason than to show appreciation for his loving kindness in wanting me to enjoy his blessings.

Collectively, these verses tell me that being prudent by saving for the future and enjoying material blessings are not mutually exclusive. So as long as my hope is in God and I am a faithful and generous steward, I'll have no trouble enjoying that side of sour cream.

Posted by Matthew at 9:55 AM | TrackBack
Category(s): Family Finances

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Financial Literacy 101: The upside of index funds

Fifth in a series for
Financial Literacy Month

At Sound Mind Investing, we're doing our part for National Financial Literacy Month by featuring a series of posts on basic principles of investing and personal finance.

Here's post five: a quick primer on investing in index funds.

A stock fund investor faces a fundamental decision when choosing an investment strategy: "Will I try to beat the market or just try to match the market?"

Attempting to beat the market requires using actively-managed funds — that is, funds that buy and sell stocks regularly in an attempt to hold only those stocks that are the best performers.

In contrast, matching the market can be done using passively managed "index" funds. These funds make no attempt to discern how specific stocks will perform, opting instead to simply buy the entire group of stocks included in a particular stock market index, such as the Standard & Poor's 500. (The S&P 500 measures the combined performance of 500 of the largest U.S. companies.) The indexer is willing to accept the "market rate of return" for that index.

Even though SMI's actively-managed strategy (Upgrading) has strongly outperformed our indexing strategy (Just-the-Basics) since the late 1990s, an indexing approach is still a good choice for some investors. Here's why:

Simplicity. Index funds are great for beginners because they are the epitome of "low maintenance." You don't have to know anything about picking funds or about diversification strategies. Just buy a fund such as Vanguard's Total Stock Market Index and — presto! — you own a share in virtually the entire U.S. market.

And you don't have to do any monitoring or fine-tuning until it's time for your annual "rebalancing" (to make sure the stock/bond mix in your whole portfolio is what you want it to be).

Predictability. You can buy index funds and hold them for years because their performance is predictable — you'll get what the market gives. You know you won't outperform the market, but you also know you won't lag the market.

That's more than most fund investors can say, since studies have consistently shown that a majority of actively-managed funds — as many as 80% over some time periods — fail to outperform the market over time. (Even the pros have trouble predicting winners!)

Availability. Usually, index funds are included as options in company retirement plans. So if you're stuck with only a handful of actively-managed fund choices in your 401(k), an index fund can be quite appealing — especially given the likelihood that most actively-managed funds will end up trailing the market. [MORE...]

SMI's Financial Literacy 101 series

• Creating your own personal financial plan
• Save by paying yourself first
• Where to put your savings
• How much should you save for emergencies?
• The upside of index funds
• A simple and steady investing strategy
• Inside-out investing
• Making the 'right' investing decisions
• Your most important investing decision

Posted by Joseph at 9:20 AM | TrackBack
Category(s): Mutual Funds

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"The income tax can't support the new era of spending"

Since this is April 15, it seems a fitting time to follow up on my mention last week of the increased attention being given in Washington to the idea of a European style value-added tax (VAT).

I came across a more detailed explanation of how the VAT works in this 2008 article from Fortune magazine. What really struck me about the article is the presumption that only more taxes can solve our problems.

Here are some of Fortune's observations, along with my comments in italics:

Fortune: It's highly possible, if not inevitable, that Americans will soon live under a radically different tax system — one that the pundits and politicians aren't talking about.

Since a VAT likely would not replace any current federal taxes, it's not a "different" tax system. It's an additional tax system.

Fortune: It's called a value-added tax, or VAT, and it's been used for decades to pay the bills and sustain the immense growth of governments around the world, from France to Mexico to Australia. Created in 1954 by a French economist, the VAT is the most potent, efficient machine for revenue generation yet invented.

Hmm. Couldn't we stop the "immense growth" of government spending so a VAT tax isn't needed?

Fortune: And if there's one thing the U.S. government needs as the federal budget balloons, it's a ton of new revenue. "The bottom line is that the income tax cannot support the level of spending that's projected..."

Then maybe we shouldn't plan to spend so much? Just sayin'...

Fortune: The genius of the VAT is that, while the consumer pays it, the actual cash is mostly collected from producers before it reaches the retailer. Since the VAT is essentially a hidden charge embedded in the price of goods and services, raising the VAT doesn't arouse nearly the uproar caused by increasing income taxes. The ease with which a VAT can be increased points to one of its big drawbacks: Governments see it as an easy way to pay for increased spending, which is a potential drag on economic growth.

The "genius" of a VAT is that it's "hidden" from the public?

Fortune: Make no mistake: A VAT may be unavoidable in the United States. The reason is that spending is rising far faster than the revenue that can conceivably be generated by the current tax regime.

Here's an idea: if you can't pay for it, stop spending. That's what our family does.

Fortune: The gap gets far larger in the future, chiefly due to rapidly rising costs of Medicare and Medicaid. To pay for those costs, we'd need to raise taxes by an extra 2% of GDP.

Medicare and Medicaid are in financial trouble? The original projections as to their eventual costs were massively understated? Wow, who knew? Good thing we're not turning the entire health care system over to... oh, wait...

Fortune: The rub is that the fiscal pillar America has relied on since 1913 — the federal income tax — can't possibly support the looming new era of spending....The VAT may be the only answer.

The "only" answer?

Fortune: European governments have typically seen VAT hikes as an easy way to raise revenues during a recession. In some countries, government spending is more than 50% of national income. The results have been fiscal stability, but lackluster growth and a dearth of dynamism and entrepreneurship.

It would seem that those "European levels of spending" have some nasty side effects. (For more on this, see "Europe's VAT Lessons," an editorial in today's Wall Street Journal.)

Fortune: Given the budget numbers, the United States has already chosen a path of far bigger government. The trap has been set. It's unlikely America can escape without a VAT.

A "trap" may have been set, but we have a chance to "escape" this November. That's why our Founding Fathers created a representative form of government — the people get a say-so, not just the politicians (and their apologists in the press).

Please pardon today's tax-day rant. Every now and then, the insanity reaches epic proportions and I can't contain myself.

Posted by Austin at 10:55 AM | TrackBack
Category(s): Taxes

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Financial Literacy 101: How much should you save for emergencies?

Fourth in a series for
Financial Literacy Month

During National Financial Literacy Month, we're featuring a series of posts covering investing and personal-finance basics.

Here's post four — about having a sufficient level of savings for financial emergencies.

Before putting money at risk in the markets, you should first establish a savings reserve. Without savings to turn to during a financial emergency or a period of unemployment, you may end up being forced to sell your long-term investments just to make ends meet. Even worse, you might have to sell at a bad time (i.e., when prices have dropped).

How large should a savings reserve be? Financial planners generally recommend an amount equivalent to three-to-six months' living expenses. SMI has long suggested a reserve of at least $10,000, but we recognize one size doesn't fit all.

Let's run the numbers. According to the U.S Census Bureau, the average "married-couple family" had a gross income of $73,010 in 2008 (the most recent year for which figures are available). Technically, the Census figure is a "median" not an "average," representing the point at which half of all married couples are above this amount and half below (see income table here). But we'll use $73,010 as the "average gross" for purposes of this illustration.

When trying figuring how much to set aside in emergency savings, we're not actually trying to replace gross income, however, but after-tax income.

Here's why: A savings reserve is designed to cover living expenses in the event of a loss of income. You won't need to replace your total income because a certain percentage of your gross goes to taxes — taxes you won't have to pay if you're unemployed.

So from the gross of $73,010, we'll subtract an estimated 16% for payroll, federal, and state taxes. This leaves $61,327 in after-tax income, which translates to a need of $5,110 per month.

Of course, in an emergency, some normal spending — for entertainment, vacations, 401(k) contributions, etc. — can be postponed. As a result, we've estimated that only 75% of normal spendable income would need to be replaced from savings in the event of a financial emergency.

Therefore, a three-month savings reserve for this typical family would amount to roughly $11,500 ($5,110 x 75% x 3). A six-month reserve would total $23,000.

The table below shows target amounts for three- and six-month savings reserves at various income levels.

You can see that the $10,000 "rule of thumb" is a good initial target for a three-month cushion, but depending on where you fall on the chart, you might want to go higher or lower (but not too much lower).

Actually, it's better to prepare for longer than three months.

(For the table, we used a uniform 16% estimate for the amount of gross income consumed by taxes. Those with lower incomes should use a smaller percentage; those with higher incomes will need to use a larger percentage.)

It's wise to keep at least two month's worth of your emergency savings in a money-market mutual fund or a bank money-market account so you can access it quickly if the need arises. Beyond that it's okay to branch out into conservative bond investments. But recognize that if you need all your savings at once, you might have to sell your bond funds while prices are down.

Ultimately, the target size of your savings reserve will depend to some degree on your lifestyle and preference. Just don't make the mistake of thinking the need for a well-funded emergency reserve doesn't apply to you.

SMI's Financial Literacy 101 series

• Creating your own personal financial plan
• Save by paying yourself first
• Where to put your savings
• How much should you save for emergencies?
• The upside of index funds
• A simple and steady investing strategy
• Inside-out investing
• Making the 'right' investing decisions
• Your most important investing decision

Posted by Joseph at 9:10 AM | TrackBack
Category(s): Family Finances

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"Three questions to ask of a top-performing fund"

A few days ago, I asked if you were on the outside looking in as the market continues its long and steady advance. If so, you're not alone. MarketWatch writer Chuck Jaffe points out that while the S&P 500 is up about 50% over the past year (from 3/31/09 through 3/31/10), relatively few investors have been along for the ride.

Jaffe provides data to support the premise that too many investors wait until there's been a solid year of gains before they come to believe that the worst is over and muster the courage to re-establish their stock positions. Since we're at that point now, Jaffe offers a warning:

Any decision to come back after strong 12-month results may be too little and too late. Accordingly, investors should understand what makes some funds shoot to the top of their peer group over a one-year stretch, and why some of those 12-month numbers are particularly misleading and dangerous....

Here are three questions to ask when considering a fund that has vaulted to the top of the performance charts...

Jaffe's questions and his related comments (in italics below) are worth thinking about — and I want to respond to them from the point of view of SMI's Upgrading strategy, which has a long and successful track record of investing in funds that have "vaulted to the top of the performance charts."

1. Is performance repeatable? You can't buy into what the fund did yesterday, so all that matters is what happens next.

Upgraders agree. The question then becomes: What clues do we have as to what will happen next? There's a significant body of research that shows there is a short-term tendency for recent winning performance among mutual funds to persist — that is, performance leaders of the recent past tend to be the performance leaders of the near-term future. SMI's performance-momentum rankings (available to our subscribers and web members) are our attempt to take advantage of this tendency.

2. How did the fund rise to the top? ...Whenever a fund tops its peer group, make sure its investment strategy and style is truly reflective of the larger group; the easiest way to top the short-term charts is to game the system.

Upgraders agree. That's why we separate mutual funds into the various risk categories — to compare, as best we can, apples to apples in terms of manager strategy and style. However, it's also true that as long as a fund continues to do well, we don't mind a little style drift. That might matter to an investor looking to own a fund for years, but is not a concern to Upgraders who own our recommended funds, on average, for less than one year.

3. Are you chasing returns? Investors typically wait to buy until the investment has proven itself with a stretch of good performance. Then the hot run comes to an end, the fund cools, and the investor never gets the stellar performance that drew them in the first place.

Upgraders agree there's a risk here, but one that's manageable. Note that Jaffe says, "the hot run comes to an end." In other words, the investor typically enjoys some degree of success initially. The idea that "the investor never gets the stellar performance that drew them in the first place" reflects the view that the investor has no selling discipline and will be a long-term holder of the fund. We rely on our strict selling guidelines to help prevent holding a fund too long once "the fund cools."

This is why Upgrading has beaten the market in 10 out of the past 11 years.

Learn more about Upgrading and SMI's other time-tested strategies. And for details on how to become an SMI print subscriber and/or web member, click sign-up button below.

Posted by Austin at 8:50 AM | TrackBack
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Financial Literacy 101: Where to put your savings

Third in a series for
Financial Literacy Month

During National Financial Literacy Month we're presenting a series of posts on basic principles of investing and personal finance. (Each post in the series can be identified by the orange character at right, working diligently on a financial plan.)

Here's post three — about choosing the most appropriate kind of account for different kinds of savings.

Money set aside for emergencies should be saved in a different type of account than money being accumulated for a major purchase years down the road. That simple and sensible guideline — different savings vehicles for different needs — is routinely ignored. Many people simply put all their savings in low-yielding bank savings account and leave it at that.

Consider the following range of choices instead.

Money Market Funds. A good MMF is a solid choice for an "emergency fund" — i.e., money that might be needed at any moment. MMFs provide instant liquidity through check-writing privileges.

True, MMF yields are at rock bottom right now, but for an emergency fund, you should be much less concerned with the return on your money than the return of your money. With MMFs you can get your money back quickly. As for safety, only one retail money market fund has lost money in the past 40 years.

Money Market Accounts. MMAs also work well for an emergency fund, and have the advantage of being insured (up to $250,000) by the FDIC.

The highest-paying MMAs are through online banks. Online MMAs let you create an electronic "link" to your regular checking account, giving you virtually instant access to your MMA savings in an emergency.

Certificates of Deposit (CDs). CDs require you to commit your money for a term of one month to five years. The longer the period you're willing to commit to, the higher the interest rate you'll receive.

CDs carry penalties for early withdrawal, so they're best used for funds you're confident you won't need until a specified future date.

Short-Term Bond Funds. If your savings won't be needed for two-to-three years, step up to higher-yielding short-term bond fund.

The downside: the prices of bonds owned by these funds can fall when interest rates rise. That makes them a somewhat risky proposition for savers with time frames of less than two years. If your savings goal is at least that far away, however, the higher yields of short-term bonds usually compensate for any near-term losses created by rising rates.

Mortgage-Backed Bond Funds. These funds, often referred to as GNMA (Ginnie Mae) funds, invest in mortgage-backed securities issued by the Government National Mortgage Association. Ginnie Maes are even more sensitive to interest rate changes than short-term bonds and can definitely lose money in the near-term, so a longer holding period is critical.

Historically, the higher yields of these bonds have eventually more than compensated for any short-term losses caused by rising interest rates. This can take time though, so only choose them if your holding period is at least three years.

A few things to keep in mind: any interest rate increases over the next few months will be good news for savers using MMFs and MMAs, while short-term bond funds will suffer initial losses. As for CDs, remember that buying now will lock you in at today's very low rates.

Although you need to be aware of how rate changes affect certain savings instruments, the easiest way to decide where to put your savings is to think about the time frame until you need the money. For money you may need right away, keep it in an MMF or MMA. For funds you probably won't need it for a couple of years, a short-term bond fund might be the best choice. For even longer time frames, consider mortgage-backed funds.

For more on this topic, see chapter 6 ("Investing Your Emergency Fund") and chapter 7 ("Investing Your Accumulation Fund") of The Sound Mind Investing Handbook (5th ed.) by Austin Pryor.

SMI's Financial Literacy 101 series

• Creating your own personal financial plan
• Save by paying yourself first
• Where to put your savings
• How much should you save for emergencies?
• The upside of index funds
• A simple and steady investing strategy
• Inside-out investing
• Making the 'right' investing decisions
• Your most important investing decision

Posted by Joseph at 9:10 AM | TrackBack
Category(s): Family Finances

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Workers of America, celebrate!

Today is a big day. After laboring for the first 98 days of 2010 at the behest of our governments, today we escape the bonds of servitude. This is Tax Freedom Day:

That means Ameri­cans [have worked] well over three months of the year, from January 1 to April 9, before they [had] earned enough money to pay this year's tax obli­gations at the federal, state and local levels...

Tax Freedom Day does not count the deficit even though deficits must eventually be financed. Since 1948, when Tax Freedom Day was first calculated, the difference between what governments are spending and what they're collecting has never been as great as during 2009 and 2010. If Americans were required to pay for all government spending this year, they would be working until May 17 before they had earned enough to pay their taxes.

Almost one-half of American households have a different tax-related reason to celebrate: the April 15 tax-filing deadline is just not that big a deal. Why? Because they pay no federal taxes at all. In fact, about 40% of all U.S. households actually receive a check rather than needing to write one, courtesy of the taxpayers who are celebrating Tax Freedom Day.

Key paragraphs from an Associated Press article in USA Today:

[April 15] is a dreaded deadline for millions of Americans, but for nearly half of U.S. households, it's simply somebody else's problem.

About 47% will pay no federal income taxes for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability....

The result is a tax system that exempts almost half the U.S. from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10% of earners — households making an average of $366,400 in 2006 — paid about 73% of the income taxes collected by the federal government.

The bottom 40%, on average, make a profit from the federal income tax system, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment.

While we're talking taxes, there is one more thing worth mentioning. Our current tax structure apparently is incapable of keeping up with Washington's spending, so we're again hearing talk of the need for a value-added tax (VAT). It's complicated in design, but relatively simple to explain — think of it as a hidden national sales tax.

In fact, you may want to pause a bit from your celebrating to learn some of the things you need to know about this type of tax.

Posted by Austin at 9:10 AM | TrackBack
Category(s): Taxes

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Financial Literacy 101: Save by paying yourself first

Second in a series for
Financial Literacy Month

April is National Financial Literacy Month — and at SMI we're doing our part with a series of posts on basic principles of investing and personal finance. (Each post in the series can be identified by the orange character at right, diligently working on his financial plan.)

Here's post two, offering practical ideas for building up your savings.

When it comes to saving, despite your best intentions, it's easy to rationalize putting it off until the next paycheck. One way to overcome this is to have some of your money put aside automatically before you have the opportunity to spend it. Here are two paths to automated savings:

• Sign up to have part of your paycheck (you decide how much) automatically deposited into a savings account at a credit union or local bank. It's easy, convenient, and offers useful discipline. Plus, your savings are insured and available for withdrawal without penalty whenever you wish.
• For a higher rate of return, set up automatic transfers from your checking account to a money-market fund (a type of mutual fund) or a money-market account (a type of bank savings account). Such transfers are relatively easy to set up, and you can have them made on a weekly, bi-weekly, or monthly basis.

If you're in your 20s, we suggest saving 5%–10% of your income. Initially, this will go toward building your contingency fund. Once that's in place, your savings can be used for a down payment on a house and other large purchases.

In your 30s and 40s, move up to a savings rate of 10%–15% of your income. Usually at this age, the primary use of savings will be to invest for retirement.

Many people believe they could never save 10% of their income! But let me ask you — what would happen if a cutback at work resulted in fewer hours and a 10% reduction in your income? Wouldn't you make the necessary adjustments in your spending so you could still cover the basics? Unpleasant though it might be, you would.

In the same way, saving a similar amount isn't beyond the financial capabilities of most families. Usually, it's a matter of having the willingness to sacrifice and make the necessary changes in lifestyle.

Adapted from chapter 5 ("Do You Have Adequate Savings?") of The Sound Mind Investing Handbook (5th ed.) by Austin Pryor. Copyright © 2008 by Austin Pryor.

SMI's Financial Literacy 101 series

• Creating your own personal financial plan
• Save by paying yourself first
• Where to put your savings
• How much should you save for emergencies?
• The upside of index funds
• A simple and steady investing strategy
• Inside-out investing
• Making the 'right' investing decisions
• Your most important investing decision

Posted by Joseph at 9:05 AM | TrackBack
Category(s): Family Finances

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On the outside looking in?

With the first quarter of 2010 continuing the market's solid uptrend, here are the approximate results Sound Mind Investing readers who use our Upgrading strategy or Just-the-Basics indexing approach have experienced since the March 2009 low (through 3/31/2010):

• +80% SMI Upgrading
• +74% S&P 500 Index (large companies)
• +98% Russell 2000 Index (small companies)
• +74% EAFE Index (foreign companies)

This is exceptionally good news for those who stayed the course, but a bit of heartburn for those who headed for the exits during the dark days of the bear. A friend (who knew better and shall remain nameless) sold his stock holdings until a more promising investment climate took shape. The problem has been (and will always be) that the market begins heading up many months before a "promising investment climate" becomes evident.

So, what to do? I suggested he figure out how much of his money should be invested in stocks (based on his season of life and other factors we explain in our publications), divide that amount into four parts, and invest the first 25% immediately. I suggested this, not because I have a particular view as to what the market will do in the short-term, but because my friend needs to overcome his paralysis. If his goal is to get back into the market, then the only way I know to do that is to start getting back into the market.

Now, whether he takes this first step with 20%, 25%, 33%, or 50% of his total stock allocation is a matter of personal preference. I chose 25% because that didn't seem too bold a step, given his current fear that he's waited too long and may well be investing at the end of the rally. But you've got to start somewhere, and this approach still left 75% safely on the sidelines.

I suggested he wait 6-8 weeks and see if he felt comfortable putting another 25% in at that time. It would be nice if he had a little profit by that time to encourage him, but there's certainly no guarantee of that.

I don't know what his decision will be, but thought I'd pass along our discussion in case there are others like my friend — on the outside looking in.

If you're not investing effectively for your financial future, take a few minutes to learn more about SMI's time-tested strategies. For details on how to become an SMI print subscriber and/or web member, just click sign-up button below.

Posted by Austin at 9:10 AM | TrackBack
Category(s): SMI Model Portfolios

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Financial Literacy 101: Creating your own personal financial plan

First in a series for
Financial Literacy Month

We suspect this sneaked up on you, but April is National Financial Literacy Month!

It's a fairly new observance, stemming from attempts by the JumpStart Coalition, founded in 1995, to improve financial literacy among American teenagers. Later, in unhappy recognition of "pervasive financial illiteracy among adults" (who apparently never learned what they should have when they were teens), the U.S. Senate passed a resolution (PDF) in 2004 in support of a Financial Literacy Month for all.

So, to do our part to help Americans become more financially savvy, we're featuring a series of posts during April focused on basic principles of investing and personal finance. Some will link to articles we've published in recent years.

Here is the first post in our series — on creating a financial plan.

What's the most common mistake people make when managing their finances? Making spending and investment decisions apart from a personalized financial plan. No matter how good your investing choices are, if they're made outside the framework of a larger plan, you're inviting trouble.

Imagine you're preparing to build your dream home. Over the years, you've accumulated scores of ideas that you'd like to see incorporated into it. Before construction begins, you sit down with your builder to review your design goals.

You ask him how long before the blueprints will be ready, but to your surprise, he tells you he doesn't work that way. Rather than planning everything ahead of time, he prefers to develop the design as he goes along. He'll keep your ideas in mind, but "blueprints are so restricting," he says — he wants to have the freedom to be spontaneously creative as the house is being built.

Most of us would be reluctant to hire a builder like that! When building a house, we recognize it's a good thing to have a carefully considered blueprint for action before taking on a challenging task. In fact, the more important the project (e.g., having open heart surgery), the more emphasis we place on careful planning.

Unfortunately, too many people use the "we'll work out the details as we go along" approach when it comes to one of the most important projects they'll ever take on — building a secure financial future. [More...]

SMI's Financial Literacy 101 series

• Creating your own personal financial plan
• Save by paying yourself first
• Where to put your savings
• How much should you save for emergencies?
• The upside of index funds
• A simple and steady investing strategy
• Inside-out investing
• Making the 'right' investing decisions
• Your most important investing decision

Posted by Joseph at 11:35 AM | TrackBack
Category(s): Family Finances

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"A changing landscape"

This simple observation serves as the basis for Sound Mind Investing's highly successful Fund Upgrading strategy: even though market conditions are always changing, fund managers rarely change their investing approach.

That explains why a manager who is hugely successful under one set of conditions can seem dreadfully inept under another. If the game the manager knows how to play (let's say he or she is an expert in small-cap growth companies) is the same game the market is playing, success occurs. But if the market changes to a different game (a preference for large value companies, for example), it's difficult for that manager's fund to compete effectively.

The always-morphing nature of the market is underscored by last week's USA Today article headlined, "Top 10 S&P 500 Stocks Change From 2007 Peak." (Because all the stocks mentioned are near the top of the S&P 500, there is a rough commonality of company size in these comparisons; but, as the article makes plain, even within the general area of large companies, relative performance is by no means static.)

Beneath the surface of the market's steady advance, a dramatic race is taking place among leaders vying to become the USA's most-valuable company.

The Standard & Poor's 500 index hangs near bull market highs, having risen 4% this year and 66% from its 2009 bear market low. Four of its most 10 most-valuable companies — Wal-Mart, Apple, JPMorgan Chase and Berkshire Hathaway — weren't among the top 10 at the market's peak in 2007, according to data from S&P's Capital IQ....

"It's a changing landscape," says Jack Ablin of Harris Private Bank. "It's amazing."...

The biggest gainer among the top ranks is Apple, which appeared close to collapse 10 years ago but is now the fourth-most-valuable company in the S&P 500, beating out Warren Buffett's Berkshire Hathaway and General Electric....

AT&T and Citigroup have consistently been among the most-valuable companies. Both were in the top 10 at the 2007 peak. Now, though, Citigroup is ranked No. 21...and AT&T is No. 14.

Time passes, things change. By leading you to funds that are performing well across several risk categories, our Upgrading strategy can help you stay on top of changing conditions. Indeed, change becomes your ally in growing the value of your holdings.

This is why Upgrading experienced a total gain of 142% over the past 11 years (1999 though 2009), while the overall market (as measured by the Wilshire 5000) gained only 21.5%.

Not an SMI subscriber yet? Today's a great day to sign up and learn more about how Upgrading can help you make the most of your investment money.

Posted by Joseph at 9:30 AM | TrackBack
Category(s): SMI Model Portfolios

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Foolish talk

This is April Fools' Day, but of course we're much too mature at Sound Mind Investing to play silly pranks on each other (ahem). Instead, we have engaged ourselves in a high-minded philosophical discussion of foolishness, recalling famous quotes about fools.

Here are three you'll probably recognize:

• "A fool and his money are soon parted" (English poet Thomas Tusser).
• "Wealth is the slave of a wise man, the master of a fool." (Seneca the Younger).
• "He is no fool who gives what he cannot keep to gain what he cannot lose" (missionary Jim Elliot, paraphrasing missionary Amy Carmichael).

Of course, the best source for wise talk about fools and foolishness comes from the Bible — and guess what? A lot of what Scripture has to say has clear implications in the financial/investing area.

• "The way of a fool seems right to him, but a wise man listens to advice" (Proverbs 12:15).
• "He who walks with the wise grows wise, but a companion of fools suffers harm" (Proverbs 13:20).
• "Of what use is money in the hand of a fool, since he has no desire to get wisdom?" (Proverbs 17:16).
• "The heart of the wise is in the house of mourning, but the heart of fools is in the house of pleasure" (Ecclesiastes 7:4, reminding us that our earthly lives won't last forever).
• "[E]veryone who hears these words of mine and does not put them into practice is like a foolish man who built his house on sand" (Jesus in Matthew 7:26).

In Luke 12, Jesus told a parable about self-focused foolishness — and again, there is a clear financial aspect:

The ground of a certain rich man produced a good crop. He thought to himself, "What shall I do? I have no place to store my crops."

Then he said, "This is what I'll do. I will tear down my barns and build bigger ones, and there I will store all my grain and my goods. And I'll say to myself, 'You have plenty of good things laid up for many years. Take life easy; eat, drink and be merry.'"

But God said to him, "You fool! This very night your life will be demanded from you. Then who will get what you have prepared for yourself?"

This is how it will be with anyone who stores up things for himself but is not rich toward God. (Luke 12:16-21)

Tomorrow is Good Friday, so we'll wrap up with this very appropriate "foolish" Scripture:

"For the message of the cross is foolishness to those who are perishing, but to us who are being saved it is the power of God" (1 Corinthians 1:18).

Posted by Joseph at 11:55 AM | TrackBack
Category(s): Christian Interest

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