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In my last post, Buying a car — new: Part 1, I confessed to doing something back in 2008 that I never expected to do: I bought a new (rather than used) car.
 Nearly all the financial "experts" frown on such purchases because of the ridiculous amount of depreciation that occurs the second you drive it off the lot. That kind of financial logic is difficult to argue with. After all, I'm a "best-deals" kind of guy and rarely are new cars the best deals.
But, as I said in the post, "Our game plan was to have a bigger car by June [2009], to boost our level of retirement savings, to increase our giving in 2009, and to make my wife happy."
Still, some blog readers, uh, "took exception" to my decision. Here's what a few commenters had to say:
"Thank you Matthew, for taking the depreciation of a new vehicle for me. Let me know when you are ready to sell it in 3-4 years so I can pay next to nothing for it in cash. I know you said you'd 'likely' own it for 8 years, but your post lets me know that you are excellent at justifying. Let us know how the warranty works. Usually covers everything except for what needs fixing. I will refrain from name calling, but your purchase surely does go against the SMI principles I've been reading for many years."
"I don't think it is wrong that you bought a new car. The problem is the principles you broke. No they are not laws, but breaking Biblical principles has a way of not working out. First you took on debt in order to buy the new car. I know you are thinking your can earn more than 1.9%, but that probably did not work out last year if you were in stocks. And we all know that we can not reliably forecast what will happen this year. Secondly you are investing in your 401(k) without being out of debt. You are breaking the order of the 4 steps that SMI outlines."
"I'm sorry, but I feel you were a bad example for going into debt for a depreciating item. It goes against all the principles taught in your own newsletter and by Crown Financial Ministries. And it was not even for absolute necessity, as for some very poor people who buy something cheap just to get to work. The price of used cars also went way down."
Yeeeouch! Maybe "took exception" is understating it a bit. They filleted me. But that's okay. We invite healthy (even if heated) discussions on financial matters at SMI: "As iron sharpens iron, so one man sharpens another."
♦ ♦ ♦
As I mentioned, that original post went up in 2009. So let's fast-forward a couple years: how'd it all work out? How did we do with our game plan?
- Boost to retirement savings – check. We were able to fully fund our Roth 401(k) here at work. And because we were investing during the bounce-back from a severe downturn, we did quite well. Upgrading was up 33.6% in 2009.
- Increased giving in 2009 – check. Years ago, my wife and I put into place a system to help us increase our giving each year. While tithing 10% is a good place to start, it is important to us for it not to be the final destination. While it's not always easy to increase our giving, we trust God to work things together for the good.
- Wife happy with new van – check. And if asked, I like it too. In fact, we like it 42,257 miles worth so far. This thing is a tool-box on wheels, making it much easier to do road trips with our three kids (fourth coming in August!), car-pooling to school, trips to the grocery and even occasional outings to Lowe's where I can take the seats out and hold quite a bit of lumber. Could we have done all this with a used car? Yes. But the peace of mind from the warranty does have its value (we haven't needed it yet by the way).
And so the million-dollar question: would we do it again?
Probably not — but not for the reasons you're thinking. It has nothing to do with the monthly payment (which we no longer have — we paid the car off in January 2011). It doesn't have to do with the lost depreciation, either. True to our plan, we intend to keep this car for quite some time. Nor does it have to do with newer models coming out making me wish we had waited.
 What then? It's the dings. The scratches. The dents. I didn't realize how badly they'd hurt emotionally.
Our nice new van now has been through a couple of fender benders, car toppers falling on the side panel (that one was all me), scratches from purses and grocery carts, crayons ingrained into the floor, etc. And every time there's a new one, it still hurts.
When you buy a car used, it's already a little imperfect, so the new imperfections aren't as painful. But with this car, each one reminds me of what use to be our perfect, shiny, immaculate minivan. I have to say, I didn't see this coming.
♦ ♦ ♦
So there you have it. And while we probably won't buy new again, I don't have regrets over buying this one new. It fit our game plan, lined up with our risk temperament, filled a need, and pleased my wife.
What about you? Ever bought new and then regretted it? Or maybe the opposite held true: you bought used and wish you bought new?
What will you do differently next time? Tell your tale.
In this two-part piece, I'm going to first look back at a post I did in February 2009 regarding purchasing a new(!) car. In part 2, we'll fast-forward to where I am now in my thinking on buying cars new, rather than used. So let's rewind a couple years, shall we?
Confessions of a liar?
Okay, I did it. I admit it. I did something I publicly announced I wouldn't do, stopping just short of telling you to read my lips. I bought a car — new. Gasp! You did WHAT?
Let me clarify a few things. To be exact, I had earlier said, "I'm not likely to buy a car new" — "likely" being the operative word. And in the post in which I made that statement, I was talking about buying a car for me. But the new car is for my wife.
But I'm sure a few of you are griping about these technicalities. So what, pray tell, brought me to this seemingly un-SMI-like decision?
Background: Last March [i.e., March 2008], we added Gigi to our fold. That meant it was difficult for the five of us to go anywhere — two car seats, a teenager, and a 2004 Pathfinder do not mix. In fact, when we went on our annual family vacation, Jordan had to ride in a separate vehicle. My wife was not happy, therefore I was not to be happy.
Being a loving husband who valued his vacation time, I quickly promised a bigger vehicle by next vacation. And after some soul searching, my wife Kim relented to the idea of a minivan (she had been plagued by the anti-minivan virus, which apparently is a very real phenomenon that mom's deal with, battling what seems to them as a loss of soul and self).
Fast forward seven months and we had the perfect storm for car shoppers: a collapsing economy and year-end inventory. Dealers needed to deal.
But you're saying to yourself, "Just go find a 2-3 year old Honda Odyssey." That proved to be difficult — unless we were willing to sacrifice our whole wish list of options, color, and so forth.
I was able to further rationalize the decision with the 1.9% financing. While I had hoped to pay cash for the vehicle, I was stymied — mostly by my decision to contribute aggressively to a newly created 401(k) plan here at SMI. Furthermore, Honda was offering to extend the bumper-to-bumper warranty an extra five years for about $300/year, and if we never used the extra warranty, they promised to refund that money. We figured that we'd be "likely" to have the car for eight years, so that was a no-brainer for us.
Why spill the beans about my new car purchase when I know I'll likely disappoint a few of you? Admittedly, it's a little cathartic. And we try to be pretty forthright around here (I've had several people inquire).
But most importantly, SMI is always talking about having a game plan and sticking to it. Our game plan was to have a bigger car by June, to boost our level of retirement savings, to increase our giving in 2009, and to make my wife happy.
That was my thinking a little more than two years ago. Would I buy new if I had it to do again? I'll have the answer in Part 2.
Ever struggle with trusting God in your finances? Join the club.
When economy seems to be teetering and the stock market is a roller coaster, trusting God for your financial future (and, yes, your financial present) can be tough.
 In a conversation Monday on Minnesota-based Faith Radio, SMI's Assistant Editor Joseph Slife talked with host Neil Stavem about being confident in our "certain God" in an uncertain world.
The Faith Radio Network, a ministry of Northwestern College, includes stations in Minneapolis/Saint Paul and Duluth, Minn.; Madison, Wis.; Fargo, N.D; and Sioux Falls, S.D.
You can listen to the 14-minute conversation below — or right click here (and "save link as") to download an mp3.
[NOTE: Do not attempt without the express approval of a supportive, loving spouse who is willing to go along with your tech-loving cost-cutting split personality!]
Back in February, I challenged myself (and hopefully you as well) to question needs vs. wants, especially keeping in mind technology and digital services. With companies constantly releasing "must-have" devices and services, both the upfront costs and the monthly fees that accompany such products can make living within your budget especially challenging.
First up, our cell phone. More specifically, texting. I had said:
Unfortunately, there's only one family plan and the individual plans wouldn't cover our average monthly texting. However, I'm experimenting with apps like textPlus which allows free texting to other textPlus users.
My first impression of textplus was less than favorable. Now admittedly, I haven't played around with it enough to give a comprehensive review, but to date, we haven't switched over. So no money saved there.
Next up, if you'll recall, was getting a credit for incorrect cable billing.
... Secondly, there was a package I NEVER signed up for (and never use) but was being charged $8/month for. I promptly canceled that one too and asked for a refund... The rep was friendly but said she couldn't do that... So I called back the next day, spoke with [another] rep, and then that rep's supervisor. I'm still waiting for a call from the supervisor's supervisor.
Well, after some kind-but-forceful persistence, the supervisor's supervisor did indeed issue us a credit of a couple hundred dollars. Just goes to show the importance of checking your bills and keeping companies accountable for their mistakes.
Third item — our home phone. I wrote:
With our home phone getting used less and less, I've been wanting to get rid of it (and its $26/month fee) for quite a while. I nagged my wife to death and she finally relented. So I ordered an Ooma. In a nutshell, Ooma is a device that connects to your high-speed Internet and your home phone and allows you to make calls at no charge...
We recently moved, so I figured I'd wait and set up the Ooma at the new house. So last week I did just that. I'm VERY happy to report that we now have a "free" home phone service. Setup took a little longer than advertised, but otherwise, it does everything it says it does and does them well.
We could add the extra features of Ooma Premier if we wanted to pay $10 a month, but we're going to pass. But I might pair it with my wife's cell phone/Google Voice so that whenever someone calls her, our home phone rings as well and she won't use her cell phone minutes. But in the meantime, we're content with saving the $26/month we were spending on a home phone.
But we weren't finished quite yet. You know that move I mentioned? We decided that would be an ideal time to cut cable TV altogether. Yeah, I said it... no TV. Not only does it save money ($50/month), it saves time. Admittedly, this may not stick as we like college basketball and football. So we'll see how it goes. If we get desperate, we could resort to watching TV on the computer. And we could always get a digital antenna and pickup signals the old fashioned way. Until then, we will keep our bare bones Netflix plan and/or use the nearby Redbox for our moving watching endeavors.
The point of all this is to get you evaluating true needs from wants. For the record, I'm not opposed to satisfying some wants if they're within your budget. Just be honest with yourself about the motivation for the product or service. You might be surprised at how few needs there really are.
"It wasn't supposed to turn out this way." So we wrote in our November 2009 article (subscribers only) about the unintended consequences of the Credit Card Accountability Responsibility and Disclosure (CARD) Act, signed into law last year by President Obama. The law takes full effect today.
AP Personal Finance writer Eileen AJ Connelly picks up the theme:
During the past nine months [since the bill passed and before it took full effect], credit card companies jacked up interest rates, created new fees and cut credit lines. They also closed down millions of accounts. So a law hailed as the most sweeping piece of consumer legislation in decades has helped make it more difficult for millions of Americans to get credit, and made that credit more expensive.
It wasn't supposed to be this way....
[The new law is expected to sharply] cut into future profits [for credit card issuers]. FICO Inc., the company best known for its credit scores, projects the average card will generate less than $100 a month in revenue within three years, down from $200 a month before the law.
That helps explain why the industry reacted so aggressively to the legislation.
No kidding.
"It's unprecedented that the government will come in and restrict the ability of [a company] to price the product the way they want to," Ben Woolsey, director of consumer research for CreditCards.com told the Atlanta Journal-Constitution. "But the fact that credit cards touch so many American households, the political pressure was so great that something had to be done," he said.
(Now that the precedent has been set, President Obama wants the federal government to have the authority to block insurers from making premium rate increases. Story here from today's Wall Street Journal.)
Going forward, the CARD law does offer new protections for consumers. Here is a list from the Journal-Constitution:
- 45-day notice: Card issuers must give a 45-day notice to cardholders in advance of an interest rate change.
- If you opt out of card changes, you have five years to pay off your balance at the existing rate.
- Monthly statements must be mailed or delivered 21 days prior to the due date. Card issuers can no longer set a deadline before 5 p.m., cannot charge for online, phone or mailed payments unless it is made on the due date or the day before.
- Card issuers cannot issue cards to anyone under age 21 unless they have a co-signor [sic] or can prove they are able to repay debt.
- The pay-off period when making a minimum payment must be disclosed, along with how much would need to be paid per month to pay off the balance in 36 months.
- Card issuers can no longer employ double-[cycle] billing.
- Cardholders must opt-in to be able to exceed their credit limit.
CreditCards.com has additional details on how the new law is likely to affect card users.
Below are several quotes about money management from late U.S. presidents. Some quotes relate to personal financial management, others to the management of the government's finances. Some touch on both areas.
First, from Kiplinger.com:
George Washington: "As a very important source of strength and security, cherish public credit. One method of preserving it is, to use it as sparingly as possible… but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it" (Farewell Address, 1796).
Thomas Jefferson: "Never buy what you do not want because it is cheap" (from "A Decalogue of Canons for Observation in Practical Life," 1825).
Abraham Lincoln: "That some should be rich, shows that others may become rich, and hence is just encouragement to industry and enterprise. Let not him who is houseless pull down the house of another; but let him labor diligently and build one for himself" (from an address to the New York Workingmen's Democratic Republican Association, 1864).
Now, a few more from other sources:
Grover Cleveland: "I feel obliged to withhold my approval of the plan to indulge in benevolent and charitable sentiment through the appropriation of public funds.... I find no warrant for such an appropriation in the Constitution" (from an 1887 veto message, when vetoing an appropriation to help drought-stricken counties in Texas).
Calvin Coolidge: "I favor the policy of economy, not because I wish to save money, but because I wish to save people. The men and women of this country who toil are the ones who bear the cost of the Government. Every dollar that we carelessly waste means that their life will be so much the more meager. Every dollar that we prudently save means that their life will be so much the more abundant. Economy is idealism in its most practical form" (Inaugural Address, 1925).
Franklin D. Roosevelt: "Any government, like any family, can for a year spend a little more than it earns. But you and I know that a continuation of that habit means the poorhouse" (from address made as a presidential candidate in 1932).
And here's a personal favorite, specifically about government, but apply it to your household finances as well — and take warning:
Ronald Reagan: "Government always finds a need for whatever money it gets."
Two days ago, we made note of a Wall Street Journal report that served as an interesting follow-up to our October 2009 cover article, Is a College Education Still Worth the Investment? The Journal found that the earnings gap between high-school grads and college-grads has long been overstated.
This story, from Fast Company magazine, touches on a different aspect of that same October '09 cover article: for-profit colleges. It begins with a very interesting angle.
Michael Clifford never went to college. He was a trumpet player "strung out on sex, drugs, and rock and roll," he says, until he started a new life as a born-again Christian and successful tech investor. Then Bill Bright, founder of Campus Crusade for Christ, gave him a life-changing piece of advice: "He knew I loved business and did a lot of charity work," says Clifford. "He told me education is the one business where you can help people live better lives and make a lot of money for your investors."
Today, Clifford chairs Significant Federation, a private equity firm that is a principal investor in a half-dozen higher-education companies, including the most successful IPO of 2008 (Grand Canyon University) and one of the most successful of 2009 (Bridgepoint Education). His six colleges have almost 100,000 students — 90% of them studying online.
The article notes for-profit colleges now enroll almost a tenth of all students, many of them in online programs. The biggest players are Kaplan (part of The Washington Post Co.), DeVry, and the University of Phoenix, now the largest university in North America (42,000 students).
While private colleges have taken huge hits to their endowments, and public universities weather historic cutbacks, for-profits like Clifford's keep costs down with innovative use of technology, publish metrics like job placements, and are open to any high-school graduate. They target under-served markets like first-generation students and working adults with convenience and a customer-service ethic....
"I don't even use the term 'for-profit' anymore," Clifford says. "I say schools are 'market-driven' or 'publicly funded.' Everyone has to put their guns away and focus on providing the best experience for the student. Market-driven can learn a lot from traditionals, and the traditionals have a tremendous amount to learn from market-driven best practices."
You can read an interview with Michael Clifford here.
Here's an addendum to our October 2009 cover article, Is a College Education Still Worth the Investment?: The long-touted lifetime-earnings gap between college graduates and high-school graduates isn't as wide as commonly reported.
The Wall Street Journal has details in a story that bears out some of the analysis in our cover article.
In recent years, the nonprofit College Board touted the difference in lifetime earnings of college grads over high-school graduates at $800,000, a widely circulated figure. Other estimates topped $1 million.
But now...some researchers are questioning the methodology behind the high projections....
The problem stems from the common source of the estimates, a 2002 Census Bureau report titled "The Big Payoff" (PDF). The report said the average high-school graduate earns $25,900 a year, and the average college graduate earns $45,400, based on 1999 data. The difference between the two figures is $19,500; multiply it by 40 years, as the Census Bureau did, and the result is $780,000.
There at least two significant problems here: 1) An average is just that — it isn't predictive of actual personal experience; 2) The earnings estimates from the College Board don't take into account any debt incurred in earning a degree. In other words, the estimates show only the revenue side of the picture, but ignores the ongoing liability incurred in an effort to produce that future income.
The WSJ notes that some researchers have been disputing the $800,000 for years, yet the College Board has continued to overstate the earnings gap.
[The Board] recently said on its Web site: "Over a lifetime, the gap in earning potential between a high-school diploma and a bachelor of arts is more than $800,000...."
The $800,000 number, it turns out, was pulled from a footnote of the College Board's 2007 "Education Pays" report (PDF) that explained lifetime earnings. The report's author, Sandy Baum — an emeritus Skidmore College economics professor who didn't write the promotional text on the Web site — says that $450,000 is actually a more reasonable estimate of the difference in lifetime earnings.
A College Board spokeswoman told the WSJ that the person writing the website copy apparently "misinterpreted the data." No doubt. But that same misinterpretation has been going on for about eight years now. Perhaps now that the Wall Street Journal has blown the whistle, the misinformation will be corrected.
The Information Age seems to have taken us full circle back to the days of hunters and gatherers — only now they're digital hunters and gatherers. Massive bureaucracies and corporate entities are all too happy to hunt down the details of our lives, scoop 'em up, and sell 'em to a willing bidder. And it's only going to get worse.
Don't believe me? Read this piece from Consumer Reports and you'll be enlightened. It outlines eight ways Big Brother is behind the scenes, quietly rummaging through life's daily transactions. Sure, some of these are supposed to be for our protection, but mostly they're for Big Brother's.
Remember that ill-fated sweater you bought for your wife last year, the one that she returned to Kohls? Big Brother remembers it:
Your purchase returns
The Retail Equation maintains information on merchandise returns made to an undisclosed number of national retailers...
What’s here?
It can include a record of your past returns at participating stores, the purchase prices, and whether or not you had receipts.
How is the information used?
Retailers are on the lookout for certain fraudulent and abusive practices.... If your pattern of returns at a particular store raises red flags, you might not be able to get your money back the next time you try. (emphasis added)
Yikes! Makes me a little nervous about my next home improvement project when I'll inevitably buy the wrong thingamajig — many times. Will I have to kowtow at every trip to the return register, praying I don't hear the dreaded, "No return for you!"?
If there's an upside, perhaps it's a potential business opportunity. I'm not sure how it would work, but there's a mint to be made for a company that can sell anonymity. If you have any ideas on how to make this happen let me know, I would love to go into business with you. But first I'd need to access your credit report, run a criminal background check, examine your insurance-claim history...
Here is an interesting tidbit from former Treasury Secretary Hank Paulson's new book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.
 Back in my temporary office on the 13th floor, a jolt of fear suddenly overcame me as I thought of what lay ahead of us. Lehman was as good as dead, and AIG's problems were spiraling out of control. With the U.S. sinking deeper into recession, the failure of a large financial institution would reverberate throughout the country — and far beyond our shores. It would take years for us to dig ourselves out from under such a disaster.
All weekend I'd been wearing my crisis armor, but now I felt my guard slipping. I knew I had to call my wife, but I didn't want to do it from the landline in my office because other people were there. So I walked around the corner to a spot near some windows. Wendy had just returned from church. I told her about Lehman's unavoidable bankruptcy and the looming problems with AIG.
"What if the system collapses?" I asked her. "Everybody is looking to me, and I don't have the answer. I am really scared."
I asked her to pray for me, and for the country, and to help me cope with this sudden onslaught of fear. She immediately quoted from the Second Book of Timothy, verse 1:7—"For God hath not given us the spirit of fear, but of power, and of love, and of a sound mind."
The Wall Street Journal has a longer version of this excerpt, courtesy of the Hachette Book Group, Inc.
While searching for something else, I stumbled across this ABC News story from October: "Latest Celeb Money Meltdown: Nicolas Cage." The article recounts the financial trials of various celebrities and semi-celebrities who have seen the the financial rewards that accompanied professional success somehow slip away.
Among those on the list:
- photographer Annie Leibovitz ("has struggled to stay out of debt");
- actor Stephen Baldwin (he and his wife "defaulted on over $824,000 in payments to their mortgage");
- baseball great Lenny Dykstra ("foreclosure sale of [his] $18 million California mansion");
- mob-boss daughter Victoria Gotti ("apparently owes $650,000 to JP Morgan Chase Bank");
- actor Willie Aames, former star of 1970s and '80s hit shows Eight is Enough and Charles in Charge ("filed for bankruptcy last year, and his home is in foreclosure");
- actress Jodie Sweetin of Full House fame ("house is in foreclosure...water has been shut off twice").
As for Nicholas Cage, one of Hollywood's highest-paid stars, the ABC report says he "owes the IRS more than $6.6 million in income taxes." A CNN story quotes the actor's former attorney (against whom Cage has filed a lawsuit) as saying Cage needed to earn $30 million a year "just to maintain his lavish lifestyle."
In a court filing, the attorney noted that in 2007 Cage went on a "shopping spree" that included "the purchase of three additional residences at a total cost of more than $33 million; the purchase of 22 automobiles (including nine Rolls Royces); 12 purchases of expensive jewelry; and 47 purchases of artwork and exotic items." Cage also reportedly bought two castles, one in England, one in Germany.
Nicholas Cage may earn millions of dollars a year, but I'm reminded of a line from Dickens:
Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
The numbers, of course, are relative. Annual income $20 million, annual expenditure $20,600,000 (or more), result misery.
Financial security/stability is far less about how much you earn than it is about how much you spend — and, of course, how you choose to invest any surplus.
There's a site in beta that allows you to compare your spending (and soon, saving) habits with the proverbial Jones's. It's called Bundle.com. That's more interesting than it may sound at first, as you can slice the data any which way — by geography, age group, income, type of household...you name it. You can even see which business end up with the most of your hard earned money.
It's quite interesting to see the story Bundle tells via its data. But it also comes with a warning label. When I reviewed Mint.com (membership required) I said the following:
The second "Trends" section is what they call "SpendSpace." Here you can choose a category and a geographical location and see how your spending compares to others across the country. You can even compare your spending by merchant.
Caution #7: This is one of the most interesting, addictive, and useless features in Mint. Why should I care if I spent less on "Hair" than someone in Cleveland? Or more at Old Navy than your average Alaskan? I shouldn't. It's not going to change my spending decisions one cent. Nevertheless, like much of the Web, it's a fascinating time waster.
This type of reporting is more-or-less the point of Bundle. Yes, there are other features like "Discoveries" which is a blog aggregate, and a spending quiz that groups you into a "spendtype." But the primary reason to visit Bundle is to, as the site says, "... see how people like you spend and save money...".
I'm not sure how actionable the data is (though it probably has its uses). But it's certainly interesting, and a little bit addictive. So consider yourself warned.
It's no secret that interest rates for money market funds are scraping bottom. Even the top recommendation in our current money rates table (subscription required) is paying a scant 0.30%. Vanguard Prime, one of the best-known and most popular MMFs available, is yielding a barely noticeable 0.05%.
So is it time to abandon the money-fund ship and move your savings elsewhere?
Russel Kinnel, editor of Morningstar's FundInvestor newsletter (and director of the company's mutual fund research), is advising MMF investors to hang on rather than bailing on MMFs and moving to short-term or ultrashort bond funds.
We're still wary of ultrashort funds [following the implosion of several such funds in 2007 and 2008]. Short-term bond funds can work if some losses in the short run are acceptable — for example, if you are parking money between investments, plan to hold for a year or two, or just want a conservative bond holding in your long-term asset-allocation scheme....
But for other uses, such as emergencies or upcoming big-ticket expenditures, I'd stay with money market funds. Think about what will happen when interest rates start to rise. Bond funds will initially lose money because their superlow-yielding bonds will be discounted in the face of new higher-paying bonds. On the other hand, money market funds will quickly start to have higher yields, yet they won't lose money when rates go back up.
Kinnel concedes that MMFs aren't exciting, "but money market funds are there to serve in an emergency. Insurance always costs you money, and that's how I'd look at money markets."
Another practical matter is simply: Is it worth the trouble to switch? A Los Angeles Times story (titled, "Look, Ma, Nearly No Yield") quotes Peter Crane, head of money-fund research firm Crane Data: "My general rule is, if you're not going to make $100 more [in interest] by switching, don't bother."
Although 2009 was the toughest year on record for money funds, the MMFs recommended by SMI outperformed the overall field (for the 12th year in a row). Details are available for SMI web members in our February Level 2 article.
In an article on passive vs. active approaches to mutual-fund investing, the Wall Street Journal quotes Vanguard founder (and passive indexing guru) John Bogle on what is perhaps the biggest challenge facing active investors: "Yesterday's winners," said Bogle, "are far more likely to be tomorrow's losers."
In other words, many actively managed funds are loaded up with stocks that did well in the past (that's why managers bought them) but that are in the process of becoming underperformers. Active managers are constantly playing a game of "move ahead, then fall behind" — which generates expenses, but not much to show in terms of actual profits in comparison with low-cost indexing.
Two observations: 1) Bogle is right — this is the general case with active management; 2) Nonetheless, many actively managed funds have runs of outperformance that can stretch for many months (even years in rare cases).
Identifying these outperforming funds and investing in them until their success begins to falter is the essence of our Upgrading strategy. Upgrading isn't perfect, but that's okay. There is no perfect strategy. What Upgrading has been able to do is generate annual returns that have strongly outperformed indexing in recent years (although not every year; as noted in our just-released February issue, indexing eclipsed Upgrading ever-so-slightly in 2009).
We're all for indexing for those investors who want to follow that approach — and we're thankful that Mr. Bogle's Vanguard firm offers a terrific mix of index funds that we use for our Just-the-Basics indexing strategy. But we're also glad that Upgrading offers a way to meet the "yesterday's winners, tomorrow's losers" challenge and (usually) come out ahead.
I recently read Stop Acting Rich...and Start Living Like a Real Millionaire, the latest book by Thomas Stanley, author of the 90's best-seller The Millionaire Next Door. There was one specific part that jumped out as something to share here.
First, let me point out an underlying truth, that hopefully most SMI readers will immediately recognize: there's a lot more to true happiness than incomes, spending habits, and such. Without Jesus, the rest isn't worth anything, whether a person thinks they are "happy" or not.
With that said, though, it's important to also point out that Christians are not immune to the correlations between money usage and happiness. So don't be too quick to discount the way you handle money as a strong influence on the degree of happiness you feel. The great news in this regard is it's the way you carry out your stewardship duties (my choice of wording) that is found to be predictive of happiness in study after study, not the absolute level of wealth or income you possess.
Back to Stanley's book. Throughout it he illustrates the contrast in spending habits between two groups: those with high incomes but low net-worth (big earners but big spenders), versus those with high net-worth who may or may not also have high incomes.
In his chapter on housing, Stanley goes into some detail about the degree of happiness these groups (and some subsets within those groups) report. Most happiness studies find that factors such as health, loving families, and enjoyable jobs are the most important ingredients to overall happiness. But in his studies, even when these other factors were present, there was still a noticeable split in happiness among the high-income group.
Stanley explains:
Much of their dissatisfaction is found in certain choices the have made. Two key choices are neighborhood and house. Both of these elements influence consumption patterns. What if you earn $200,000 a year but spend like neighbors who earn $300,000? You are likely living above your means. As my surveys and studies have found, those who live above their means tend to be dissatisfied with their lives. Conversely, those who live below their means are significantly more likely to report that they are happy.
He goes on to develop the point that the price of the home is only the beginning. When you live in a more expensive neighborhood, the cost of everything seems to creep up, if for no other reason than the spending habits of your neighbors tend to pull yours upward. Few are immune to that tug (and those who are probably are less likely to buy into the more expensive neighborhood in the first place!).
Stanley is hitting on a theme here that we've mentioned before in this blog, namely that absolute income is not as good a predictor of happiness as relative income. To illustrate this simply, someone making $100,000 is statistically more likely to report they are happy if they live in a neighborhood where most of the neighbors make $75,000. In fact, it's quite likely that person could make more money, say $150,000, and wind up reporting they are less happy — if they live in a neighborhood where most of the neighbors make $200,000.
In case you're tempted to think you would be happy in any of those scenarios, given the high incomes I'm talking about, guess again. The same pattern holds whether you cut all the numbers in the prior paragraph in half or double them.
Stanley has this advice for those caught in this trap, or possibly inching towards it without even realizing what they're about to do:
How can these Smiths [those with relatively lower incomes than their neighbors] find happiness? Get out of Jonesville [i.e., neighborhoods with houses that are a struggle for them to afford]! This is an especially urgent message now with real estate prices plummeting and some tempted to grab a so-called bargain in or around an exclusive neighborhood. Never forget that that nice house in the prestigious community will cost you considerably more than the price of the mortgage, real estate taxes and insurance.
Your ego may take a bit of a bruising by admitting that you don't have the income to live among the glittering, but bruises fade with time, and it's almost guaranteed that your satisfaction with life will increase once you are no longer fighting to keep up with those who can simply run faster.
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