Book Review: "Save Your Retirement"

The hook for this book by Frank Armstrong III and Paul Brown is in the subtitle.  Notice it's not "Save FOR your retirement".  It's "Save Your Retirement: What do Do if You haven't Save Enough or If Your Investments Were Devastated" is a book of distilled wisdom compiled by a CFP® and professional financial journalist.

It's really mostly the gloss they put on it as an excuse to write yet another book on a tired subject. Basically, they suggest you not retire if you can't afford it. Sorry, spoiled it.

But I liked the book overall. I found the structure to be useful, segregated out into different chapters depending on how many years out you were. There were some useful nuggets. As I say, "rules of thumb work pretty well for people with thumbs."

Although I mostly liked it, I had two quibbles about this book.  One was that they starkly say "don't buy annuities".  Money managers have a HUGE thing against annuities.  I really wish people would talk more about the risks and benefits of annuities, because I can think of at least two different scenarios where "definitely buy annuities" would be better advice.  Most of the time the correct advice is "consider carefully whether to buy an annuity, because it may be appropriate in your situation and you won't find out from an annuity salesman."  That means you DO need to find out from books like this, and it totally dropped the ball on it.

The other quibble was that it didn't really talk about percentages you need to be saving.  I've seen some really decent scholarship saying that the savings RATE is really super important, more than the amount you've got saved at any given moment, in terms of being able to reproduce your desired lifestyle.

That said, it hit some really good moments when it discussed estate planning up front (hello, dying is actually an important aspect of your retirement plan) and it also did a good job of trying to squelch lifestyle inflation after your kids leave home before you retire (the extra money freed up when they leave home is not for ramping up lifestyle, it's for fixing your beleaguered retirement plan.)

All in all, I'd recommend the book as an easy read with a few good ideas, but I'd pair it with a different book on when and why you'd want to convert your 401(k) into an annuity.  I'll have to let you know when I find that one.

Book Review: The New Retirementality by Mitch Anthony

Mitch Anthony is a sales consultant to the financial services industry.  He's not actually an investment adviser, he teaches investment advisers how to get clients.  His skill is in inspirational public speaking.  If I had known this up front I would not have bothered to read this book.  But it was interesting.  "The New Retirementality: Planning Your Life and Living Your Dreams... At Any Age You Want (Third Edition)" was a bit of a hodge podge.

The first part of the book appears intended to help grasshoppers feel okay about not having saved for retirement.  He comes at why this is okay from a bunch of happy angles.  For example, he doesn't see why you can't just start now and get 15% return on your investments if you want to play it safe, or maybe 50% return if you care to gamble a little.  Oh, did I mention, this was originally written at the top of the internet bubble in the late 90's?

And, hey, if investing isn't your thing, you can always sell your house at an enormous profit and move to a cheaper location.  But, uh, he also suggests you keep your social circles intact.  Maybe by cheaper location he means an apartment in your same town.  (The second edition was written in 2003.)

His other main thrust is that it's perfectly fine to not save because you can keep working.  After all, people really benefit from working.  It helps their soul.  All you have to do is find a vocation that you love and structure it so you can work part-time.  He then goes into a few chapters stolen straight out of "What Color Is Your Parachute" to inspire you to go find a job that makes you happier.  Because, he says, the workplace is so desperate for employees that they will gladly bend over backwards to accommodate aging baby boomers.  (Did I mention that the most recent edition was written in 2008?)

But, anyway, to "retire" is to get sick and die.  (He has a causation vs. correlation problem here, in my opinion.)  Instead of being incapacitated by old age, though, he suggests that it is way better to stay vibrant and young, which you can do by continuing to work.  And don't you worry none about social security imploding.  This is the baby boom we're talking about, and they are rule-breakers!  Not ones to let simple math get in the way!  No one dare defy the Baby Boomers when they want something.  So relax.  Take a cruise now if you want.  You'll be fine later.

Then he goes into a section on "Your Money and Your Life" which is radically different than the excellent "Your Money or Your Life" by Robins & Dominguez.   Mitch Anthony's point is that you shouldn't care about Return on Investment - which he says is outside your control - but instead be concerned about Return on Life.  I kind of liked this, to be honest.  He said not to be a gerbil on a wheel, but rather to use your money as a sail on the boat taking you places.  He said that a good return on life meant:

• I'm living well within my means.
• I'm investing time, energy and resources in those I love.
• I'm allowing myself to have experiences and live whenever possible.
• I'm saving with discipline.
• I'm not comparing my progress to others who live with a different set of circumstances.

I agree that you need to have a vision of what you want out of your life, and harness money to achieve that vision rather than just accumulate money for the sake of money alone.

He also had a nice section on "Maslow Meets Retirement" where he asks you to identify the part of your budget that is:

• survival,
• safety
• freedom (hobbies, travel)
• gifting,
• dreaming. 

Then he bids you to identify the sources of funds you will allocate to each of these categories.  I thought that was a useful concept.  He flew right past it, though, without every throwing any actual numbers at it.

He also gets into a section on "Money Maturity" that appears to have been cribbed from George Kinder's "Seven Stages of Money Maturity".  At this point I'm being impressed that he has read all the same books I have.   I liked his section on "wealth-care checkup".  He says to watch your balance, or else:

• Physical rest becomes laziness
• Quietness becomes noncommunication.
• The enjoyment of life becomes intemperance
• Physical pleasure becomes licentiousness
• Enjoyment of food becomes gluttony
• Self-care becomes selfishness
• Self-respect becomes conceit
• Cautiousness becomes anxiety
• Being positive becomes insensitive (his term, mine would be "oblivious")
• Loving kindness becomes overprotection
• Judgement becomes criticism
• Conscientiousness becomes perfectionism
• Interest in possessions of others becomes covetousness
• Generosity becomes wastefulness

The theme emerging here is that you don't need to save for retirement, you just need to find a job you love, stay healthy and age well, and not worry about material things.  See?  The New Retirementality.  Oh, and have an extra $250K stuck aside for health care spending you're really going to want to do, and maybe another $50K to help your centenarian parents when they run out of money.  But, hey, other than that kick back and relax.  Except when you're at work.  Work hard then.  Because you've got shit-all to fall back on.  But don't worry, be happy!

Oddly, I did get some business management tips from the section on how to find a good employer.  I might write those notes up as I'm probably going to be hiring some staff next year (as I work hard getting set up for retirement) and can always use more tips on managing employees.

Book Review: The Age of Deleveraging: a tome by A. Gary Shilling

I heard Gary Shilling speak at a conference last month and his discussion of demographics was interesting and insightful so I sought out his most recent book: "The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation".  This book was 500 pages long.  Five hundred.  I told B. I felt like I was taking a graduate level course in economic forecasting.  I'm not even sure how to integrate this book into my body of knowledge, but here's my attempt.

The first 125 pages or so are on the subject of why we should listen to him.  Each chapter is about triumphs in prognostication he had over the years, his "Seven Great Calls" when he predicted major economic changes.  I found the history to be occasionally interesting and skimmed the chapters looking for what he considered the markers of change.  The main thing he appears to do is to really dive down into the STORY that the economic indicators are telling.  Look at the big picture: where are the demographics?  What is the existing inventory level?  What makes SENSE to happen next?  I found his methods to be plausible and in line with the way I look at the world, too.  Each of the many threads emerges into a tapestry if you stand back and look at the big picture.  This is why I read so many threads and go for long walks to let it gel.  I'm not Gary Shilling, but I don't have to be if I can listen to people who see the big picture.

The central premise of this book is that Gary Shilling sees slow growth ahead.  Period.  He stands with Mish Shedlock in the deflation camp (although he never mentioned Mish Shedlock.)  Instead, he takes on more esteemed heroes of mine.  He pooh poohs Peak Oil (we'll switch to natural gas, he says, and doesn't sound cornucopian when HE says it.)  He dismisses Milton Friedman's definition of inflation "as always and everwhere a result of excess money."  What is money, asks Shilling?  If you have a $10,000 credit line on a credit card - whether you use it or not - isn't that money?  American Express cards have no limits on them... what does THAT mean to the money supply?  Instead he talks about there being seven varieties of inflation/deflation:

1. Commodity
2. Wage-price
3. Financial asset
4. Tangible asset
5. Currency
6. Inflation by fiat
7. Goods and services.

I have to admit, I really liked having seven dimensions to this issue.  It is far more satisfying that Friedman/Martenson/Austrian versions.  It fits reality better.  It's hard to hold them all in my head at once, and they often move in tandem, but they actually are NOT identical and our current world situation has allowed the effects of different parts to be teased out better.  If I ever re-read this book it'll be for Chapter 8: "Chronic Worldwide Deflation".  This is where he makes the case that he isn't just some cranky old man moaning about how things were better when he was young (and get off my lawn, kid!)

Chapter 9 talks a bit about what help we can expect from the Fed, IMF and Congress.  It's a short chapter.  (Synopsis: none.)

Chapter 10 is about the outlook for stocks.  The short version there is that he expects very low earnings going forward.  He pretty much stayed away from the question of whether to buy index funds or managed portfolios in a confusing way, by saying managed portfolios will do better, except most of the time they don't.  He is not a fan of long-term buy and hold and hates asset reallocation strategies, too, thinking it's foolish to sell your winners to buy your losers.  Far better to just buy winners low and sell them high.  (D'oh, why didn't *I* think of that?) So, all in all, this chapter was pretty worthless to me.  (Because every book that says, "first, start by buying a high quality stock cheap right before it goes up" is similarly worthless, although is certainly fine advice.)

Chapter 11 was his explanation of twelve investments to sell or avoid.  This is worth elaborating on:

1. Big Ticket consumer purchases (because people will be more austere and expect prices to fall so they'll wait to buy.)
2. Consumer lenders (who are about to find out that "deleveraging" means that they don't get paid back)
3. Conventional home builders (demographics suck)
4. Collectibles (there's a distinct shortage of greater fools)
5. Banks (see #2)
6. Junk securities (did you notice how the lenders faired in #2 and #5)
7. Flailing companies (uh, when WERE those a good idea?)
8. Low tech equipment producers (becoming obsolete and fungible at the same time)
9. Commercial real estate (low growth = high vacancies)
10. Commodities (they're being played by speculators)
11. Chinese and other developing country stock and bonds  and
12. Japanese securities.

Japanese securities were because Japan is a stagnant aging population with a serious debt problem whose heroes all die in kabuki plays (or something like that.)  But the Chinese and other developing country stocks and bonds was because of currency risk and because the economy is still too dependent on exports to the First World.  Until a country develops a sizeable middle class that can purchase its own GDP the economy is too tied to ours, he claims, and so you just end up with the currency risk that will eat up any growth.  He also thinks that China has been stimulating itself into creating too much capacity that they aren't yet using.  In other words, he's expecting deflation there, too.

Instead, he suggests you buy:

1. Treasuries and other high-quality bonds. (This guy loves him some long bonds.  He had a unique voice on that subject and I should probably reread this section because I find myself really confused how the Long Bond could be a good investment in a 0% world.  He appears to be expecting the interest rate to go still lower!)
2. Income-producing securities (sort of the opposite to #7 above, I mean, duh.)
3. Food and other consumer staples (because they won't be subject to people putting off buying them.)
4. Small luxuries (fluffy toilet paper?  Watches?  Cosmetics?)
5. The U.S. dollar (he made the case that no one else has anything better.)
6. Investment advisers and financial planners (Wuhoo!  He makes a case that we're worth our keep.)
7. Factory-built housing and rental apartments (so, buy those REITS but make sure they aren't commercial, merely residential housing.  Uh, good luck with that.)
8. Health care.  (Demographics, government unicorn funding, the thing people want above all else)
9. Productivity enhancers (because everyone wants to run their business without actual people)
10. North American energy (because we're massive hogs who care not one whit about climate change and want our air conditioning RIGHT THIS MINUTE without having to negogiate with Iran for oil.   Sounds like a solid bet to me.)

The pieces I find myself thinking about in new ways are 30 year treasury bonds (it comes as a surprise to me that someone LIKES those) and that emerging country growth won't be as solid a play as I was thinking.  He also gave me some instruction on how to think about the Big Picture, and my brain may be ready for more on that subject after I rest up from reading this book.  It was tough going at times, and he occasionally veered into stories about his days meeting with captains of industry or highly placed officials.  I guess he's allowed.  He's pretty proud of the job he did replumbing the house he bought in 1968 and still lives in.  I found myself liking the man, much the way I like Jack Bogle and Bud Hebeler.  Overall, recommended, but be prepared to skim some parts.

Two Very Different Books about Integenerational Wealth

I've recently finished two books that are very different but I'm going to review them together because they are oddly similar.

The first one I read was "(Not) Keeping Up With Our Parents: The Decline of the Professional Middle Class" by Nan Mooney.  The gist of this book is that people who went to college for degrees in creative writing or art history are pissed because they came out of school with massive amounts of student loans and can't get jobs that pay enough to cover their apartments in Manhattan, much less a nice detached split-level in New Jersey.  The entire book is devoted to exploring the raw deal that the "creative professional class" gets when their special snowflakeness turns out not to command the income they would prefer.  In other words, it turns out that the middle class, unlike being poor or being rich, is NOT an inherited position, but one each generation must earn themselves.  And it's HAAARRRDDD.

Whiny doesn't begin to describe it.  The entire book whines about how easy it is to lose the house you purchased with 0% down (or, in some cases, a 110% mortgage) and how no one could be expected to save what with what things cost now-a-days.  The solution is for more government support of artists at the style to which they would prefer to become accustomed.

It's a well-researched book and full of references to Brookings Institution studies and every Barbara Ehrenreich book or article ever written.  In fact, there's an 11 page bibliography that is heavy on Paul Krugman and Elizabeth Warren.  Notably absent: Hayek.  The other thing notably absent: any suggestion at all that people refrain from going to Harvard or becoming artists if they can't afford it, and save up for things they want in life.  In fact, she specifically pooh poohs the concept of saving:

"There's a pervasive notion in recent media that, though retirement security might be a legitimate concern for low-income workers, when it comes to the middle class, lack of savings is a question of more discipline and less procrastination.  If only educated professional could start saving early and sensibly, they'd be fine.  But stories like Lewis's reveal the flaws in this sort of logic.  The reality is that stagnant salaries and higher health-care, housing, child-care and education costs make it very difficult for even educated middle-class professionals to save anything at all.  Because we're pushing so many major financial decisions to later in life - in the hopes that later will be when we can finally afford them - those high-cost expenditures are bumping up against our retirement years.  With so many people going back to school later, having children later, and buying homes later, the balance of our financial ecosystem has changed.  Retirement can hit at the same time we'll be trying to put our kids through college, and before we've managed to pay off our mortgages.  Not only is there less to stow away these days, but there's less time in which to do it."

This book had me grinding my teeth wanting to yell at her about personal responsibility.  But, hey, that's explicitly what she was TRYING to offload.

"Over the fifteen years I've spent in the workforce, I've been personally responsible for covering most of my own health care and all my retirement savings."  She then goes on to say how unacceptable this is and how it drove her to write this book "to understand what we as a society must do so that circumstances for those in situations similar to my own might change." 

Later, towards the end, she has a heading called "personal responsibility".  It was amusing.  You could tell that editors and reviewers had been trying to tell her something.  "You need to put something about PERSONAL RESPONSIBILITY in your book" they must have been saying.  So she put two pages in where she suggests you become educated about your own finances and try not to live beyond your means.  Even here she still doesn't mention saving, just getting help in understanding how to refinance your debt.  Then she suggests that you not resign yourself to the fate of living on what you can make, but get involved in a revolution to get the government to pay you better.

When I googled her I found out that she left Manhattan after writing this book to move in with her parents when she was "single, broke and pregnant" at the age of 38.  I'm sure her parents are thrilled.  Oops, maybe not.  More googling shows that she then had another child (so she has two under the age of 4 now as a 42 year old unmarried writer) and her Dad just died.  Well, maybe her Mom had a good job.

The next book was "The Legacy of Inherited Wealth: Interviews with Heirs" by Barbara Blouin & Katherine Gibson.  It came out of their experiences being therapists counseling people who suffered from being inheritors of great wealth.  It was told with great heart and a total lack of snarkiness, even when "I'm An Alcoholic" screamed across the page like a watermark on one of the stories (where a woman rants how her lousy ex-husband stole all her money - by giving it to her to spend.)

There were 17 different stories about how people handled being plunked into the upper class without deserving it.  Some of them longed to be middle class.  A few longed to be poor.  A few were just fine and dandy with circumstances as they were.  Several of them talked about their desire for social justice and to use the money they had philanthropically.  One gave away all his money and started on the lecture circuit preaching that everyone else ought to, too.  There were suicides and alcoholism and drug addiction represented at the levels I've noticed.  But there was an undercurrent of hope as eventually all these people damaged by too much money learned to be okay with it after all.  The ones that hadn't died from drug overdoses, that is.

Barbara Blouin is active in a group called "The Inheritance Project" that tries to help the very wealthy be decent people, despite their significant personal challenges.  In an odd way, I found it more hopeful and inspiring in terms of people taking personal responsibility than I did the book about people demanding they stay in the middle class.

Another thing I found interesting is that the desired lifestyle of the inheritors is PRECISELY the desired lifestyle of Nan Mooney: working in the arts or in low-paid not-for-profit sector in jobs where you are not worried about having to trade your day's actual labor for money.  I've tried to tell this to my clients before: the people who are "making it" as sculptors or artists?  They have trust funds buying their houses, cars, health insurance and education.  This is also true for a lot - although by no means all - of the people working in not-for-profits for $24K/year, and often times the wealthy person donates to the organization enough to cover their own salary.

These two books were about "class" and I've always found this a bit murky.  Nan Mooney describes it as people making $30K to 100K.  Barbara Blouin describes it as "people who do not need to work for a living."  Both of them were trying to nail down how people's parents' class affected their own class.  As someone who is "bi-classal" I find this interesting at a personal level.  I may do more reading on this, but I'm not sure I will.  I never know what to do with these conversations.

Because, in the end, it doesn't matter to me what my parents have or don't have.  It's 11:30 on a Monday morning and what happens to me depends on what I do next.

Book Review: Julie Jason's AARP Retirement Survival Guide

Julie Jason's book is entitled: "The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad".  It's a title done by committee.  Really it's a guide to avoiding the sharks swirling around you in retirement.  It's filled with hints of things to watch out for, with sections called "Julie's Don't-Be-Fooled Rules".   I liked her clear explanations and approved of her hints and warnings.  I think it did good coverage of the issues and clearly specified which issues she was NOT covering as beyond the scope of this book.  I appreciated that and approved of the scope she chose as wide-ranging enough for most people.

There was not enough about budgeting.  Budgeting skills are HUGE in retirement, and having a decent handle on your budget is the foundation of all the other pieces.  (How much annuity should you buy?  Depends on your budget needs.  Should you take that lump sum or a pension?  Depends on your budget needs.  Should you delay taking social security?  Yes, if you have assets to plug the budget gap until you're 70.  Should you get Medicare Part D?  Depends on your medical spending habits.  Budgets are HUGE and she did a very cursory version of this.  I preferred "Getting Started In A Financially Secure Retirement: Pre- and Post-Retirement Planning In a Time of Great Uncertainty" by Henry Hebeler for a more thorough treatment of budget issues including potential budget busters to watch out for.

My other quibble with Julie Jason's book is that her guide to finding an advisor would find only her.  She's a "Retirement Income Advisor". Huh?  Personally, I'm a CPA.  My clients come to me each year to discuss their finances in the context of paying taxes on their income.  I expand on that service to offer them advice on how to get a handle on their budgets, how to build net worth by managing debt and saving and investing, and keeping an eye on financial planning issues like saving for college or planning for retirement, disability or death.  I do not sell securities.  Many of my clients do their own investing and I guide them in asset allocation buying low cost index mutual funds or ETFs, although some of my clients also have a financial advisor who gets a fee for assets under management who might do budgeting and planning, I don't know.   Some do, some don't.  A few of my clients have brokers who just get paid on commission and never talk to my clients.  I advise my clients to save the money and just invest it themselves.  Some do, some don't.  (Store-front commission-based advisors are lacking in fiduciary responsibility, I've noticed.)

Most of my clients also have a lawyer to draw up wills and POAs and possibly estate planning documents like bypass trusts.  But a "retirement income advisor"?  Seriously.  I'm glad she has a niche clientele in her Stamford Connecticut practice.  But 99% of the readers of this book aren't going to find a "retirement income advisor".  Sheesh.  Ask the CPA or personal financial planner or lawyer you already USE these questions!

But I liked her writing style and I'd read other books by her.

Book Review: "All Your Worth" by Elizabeth Warren

I've heard wonderful things about Elizabeth Warren and I was intrigued by the concept of this personal financial husbandry book.  The title of the first books I read, "All Your Worth", made me cringe as it makes me think of a misspelled contraction.  But it's not a pronouncement or a discussion of what you are worth.  Instead, it is a suggestion that you might be better off if you built some net worth.

The basic breakdown of this book is that you should set up your personal financial situation so that your "must haves", non-discretionary stuff that you couldn't cut back on if your paycheck went away for some reason - should be no more than 50% of your income.  Savings and other things to build net worth should be 20% of your income.  And, voila, now you have 30% for fun money.  See, wasn't that easy?  Don't try to arrange your budget by cutting out the fun stuff, arrange it by cutting out the FIXED NECESSARY stuff.  Get a room-mate.  Drive an old car.  Don't send your kid to private pre-school.  Don't buy a house you can't afford on just one salary.

The premise here is that if you stay in these guidelines you won't have problems with debt or feeling deprived.  It's a workable budget.  I like the premise and have loosely followed it my entire life, although we did it slightly differently: I always saved 10%, not 20%, and we more or less set up our finances so that the fixed stuff was covered by my husband's regular salary and all the intermittent (and largely discretionary) stuff was covered by my intermittent income (combine with occasionally discretionary extra hours).

It's a nice idea.  I liked this book, although I felt a lot condescended to by the crooning voice.  (I listened to it as a book on tape as well as read the hard copy, depending on my location as I read/listened to it.)

Then I went on to read her "Two Income Trap".  It's more the research version that lead to her upbeat positively framed prescription of how to live your life in "All Your Worth".  The "two income trap" is the results of her in depth multi-year research project into why people declare bankruptcy.  What went wrong?  Why are the middle class in such awful shape? 

Her conclusions are that we raised the ante on what we wanted and expected when we had two available workers, and therefore went off and bought higher priced homes and more effective (and expensive) health insurance and paid through the nose for expensive education.  And at the end of the day we have less savings and less discretionary spending than ever because more of the expected income is dedicated towards these big three things and now we're more vulnerable because we need BOTH workers to be working and we've doubled the chances that one will be injured or die or be laid off in any given year.  At the same time we've lost the safety net of having a spare worker that can swing into action and/or provide necessary care-giving and home economics chores.  This is the main insight into this book and is an interesting concept worth pondering.

But she doesn't just illuminate, she pontificates.  Her solution is to suggest that women should stay home and live a reduced lifestyle because if something happens then they will have to live the reduced lifestyle anyway.

I boggle at this conclusion at many levels.  So, since there's a 1 in 7 chance of financial failure from this arrangement we should make it a 100% chance of failure by not engaging in it at all?   Does this make sense to anyone?  And where is the acknowledgement that we are actually spending our money on extra things we WANT?  Buying more effective health care, larger more comfortable houses and more specialized education are actually things we WANT!  Want bad enough to send the second spouse into the workforce to get!

And why must the WOMEN stay home?  We live in a world where men's skills and strengths are not as valued anymore, where the majority of the good jobs are more in line with women's skills and education.  Where in all of her points does she make the leap that suggests that stay-at-home spouse should be the women?  This really bugged me at a very deep level: it's not just the weird sexism, but also the total lack of grasp of the nature of the 21st century workforce and/or distribution of educational achievements.

A lot of the book is designed to push policy objectives, some of which make sense.  I found her to be fairly independent-minded politically - she said things that would piss off both Republicans and Democrats - but even though I largely agreed with her main points (regulate interest rates that banks can charge) I still found myself irked with the conclusion that people are stuck because of the system that leads them astray.  It's like blaming McDonald's for obesity.  Her refrain of "there oughta be a law" started to bug me.  (Perhaps, to be fair, it bugged me because of my own personal belief that our political system is completely incapable of effective solutions to any problem and you just waste time and energy by pursuing that.  I acknowledge that my cynicism isn't universally shared.)

I like her compassion.  I like her scholarship.  I like most of her common sense advice.  But in the end I find her solutions to be annoyingly flawed primarily because they ARE so close to the truth.  No, you should NOT pledge all your income to fixed expenses precisely BECAUSE stuff will come up that you didn't expect.  I think she would have done well to devote more attention to outlining for people the things that they should attempt to put in their budgets rather than just wave hands and say, "shit happens".  In my experience a whole lot of the shit that happens can be reasonably predicted: cars will need repairs, dogs will need vet visits, Christmas presents will probably be purchased again this year.  Intermittent expenses creep up on people and a decent budget accounts for them.  She just called for  50% for fixed, 20% for savings and 30% discretionary and done.  It has beauty in simplicity, but also stupidity in simplicity.

But, still, it's a reasonable concept and worth consideration.  I like rules of thumbs for people with thumbs, i.e., they do tend to work most of the time.

All in all, "All Your Worth" was a lot more useful than the "Two Income Trap".

Book Review: "Your Money & Your Brain"

"Your Money & Your Brain" explains just how stupid you really are  

I've heard this mentioned a couple of times and so, when I saw it on the shelves at the local library (what, you don't cruise the 332 section of the library just on spec?) I picked up Jason Zweig's "Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich."   I liked it.

I dislike the subtitle, though.  I bet there was a huge battle about it between the author and the publisher.  "I'm not telling them how it will make them rich!"  "You have to pretend to say that to sell the book!"  It's really not about how to make you rich.  It's how to try to keep you from being so stupid that you lose your money.  His basic premise is that human brains did not evolve to handle investment decisions and will almost always reflexively choose the wrong solution to every financial puzzle.  He wants you to fight these reflexes and use your REFLECTIVE brain, instead.  He points out common thought traps and some solutions for navigating around them.  This book is all about staring at human frailties and then dealing with them.   He starts out each chapter with a homey little anecdote: does bread always land butter side down?  How come?  And then he goes into the science of what ever he's talking about.  It kept my attention almost the entire way through.  Just when it started to drag a bit I discovered that the last quarter of the book are appendices.  (He and his publisher probably fought about *that*, too.)

The author is a journalist, not a scientist, and I think it's important to realize that pop science writing like this is probably about as accurate as Wishbone's version of Don Quixote.  But, speaking as someone who learned most of the opera she knows from an episode of Gilligan's Island, sometimes pop culture *is* the best lens through which to learn this stuff.  I thought this book was worth the read and his warnings were well worth heeding.

In brief, he wants you to stop and think.  If you like a stock at $x, why wouldn't you want to buy more when it goes on sale?  Instead, people tend to sell when a stock drops.  Don't do that.  Buy the company, not the stock.    He writes:

Take the global view.
Hope for the best, but expect the worst.
Investigate, then invest.
Never say always.
Know what you don't know.

The past is not prologue.
Weigh what they say.
If it sounds too good to be true, it probably is.
Costs are killers.
Eggs go splat.

Think twice, get it?

By the way, he thinks you should stick all your money in a Vanguard Target retirement fund and be done with it.   I'm inclined to agree.

Book Review: "Show Me the Money"

First, buy a stock right before it goes up...  

One of my clients passed along a book for me to read: "Show Me The Money: Covered Calls and Naked Puts for a Monthly Cash Income" by Ron Groenke.    It was all about the uses of covered calls and naked puts and how much money a few good stocks you have in your portfolio could make for you by selling these options to other people, essentially making money renting out the option to buy your stocks to people.  What a grand idea: ignore dividends and capital appreciation, just make money because you OWN the stocks.   I read it with some interest.

It goes like this:  first you use your superior stock picking skills (or buy his software) to pick good stocks that are about to go up.  You can tell which ones those are from their technical charts, they're the ones currently at their 52 week lows, among other criteria.

Then you sell options at a high premium, something like 10% of the stock's underlying value, knowing that it's likely to expire.  Apparently someone will take the other side of this trade because someone somewhere wants to pay high premiums for things that are likely to be worthless to them.  Which is interesting, because every time I've looked at this the premiums are so low that the commissions eat a significant portion of their value.   But, anyway, the way he tells it you just buy these great stocks and sell people the option to buy them from you for good money.

Then you sit back and let the money flow, putting on new covered calls every month or three on the same stocks as they keep expiring worthless, picking fruit from your money tree.  (Without, of course, the premium people are willing to pay being reduced.)

The book thoughtfully takes you through a gedanken exercise where some of your stock picks go bad.  After all, it happens to the best of people (although what could go wrong when you buy a stock at its 52 week low?  It's already low!  It must be about to make a sine wave shape!)  The author allows that maybe 15% of the time you could lose a little money.  He figures that you'll make some capital gains along the way when you have to produce a stock for an accepted call at prices above your cost, and that will more than offset any commissions you might have to pay on these calls so he discounts that in his calculation.

See, it can't go wrong!  o.O

As a tax accountant I truly hate the options markets.  My clients always lose money.  Always always lose money.  It's like the new Amway pyramids: someone somewhere made it work for a while and passed along a rumor that they got rich and it just sends droves of pawns into the market.  Oh, there'll be wins.  Short-term capital gains wins, that is.  In MA short-term capital gains are taxed at 12%, so someone in the Federal 25% bracket will pay 37% of their winnings to taxes.  But, of course, they don't have winnings over time, because options premiums are NOT priced irrationally.  So eventually they slink away with their losses, leaving survivor bias to carry the banner.  And they are big honking carryforward losses until they have no more portfolio left to generate any corresponding gains.  In MA you can only use capital losses against investment income, which of course there isn't any if you aren't bringing in any dividends or interest because your money is tied up in short-term stocks.  You never even USE those losses.  Sigh.

I can see *MAYBE* doing a naked put if I'm sort of maybe interested in buying a stock if it goes low and I'm too lazy to keep an eye on it myself.  But here's the thing: it's utter hubris to think that I can pick a stock.  I pick stocks just about the same way I picked horses at Churchill Downs: I look over their information using my own personal training (as a CPA with a MBA for financial statements on the one hand, and as the daughter of a man who raised and raced thoroughbreds on the other) and then I listen to my hunches and make my pick.  I am right just about the exact amount of time that random odds suggest I would be.  Maybe I'm fooling myself about my level of ability to evaluate, maybe I'm not.  The markets can stay irrational longer than I can stay solvent.

But I'm trying to understand and appreciate the wonders of options.  I really am.  But I just keep getting stuck on the initial premise: that you can look at history and it will tell you the future.  Yes, that works in some arenas.  But stock picking?  Really not.

Oh, and I hate it when my clients raise horses just as much as I hate it when they play the options markets.  Don't even get me started on the folly of the thoroughbred industry!

Three book reviews on investing

Pie and Pie Charts  

I'm reading up on retirement planning both because I'm trying to rationalize why I bought a vacation property (it's part of my retirement portfolio!  Really!) and because I'm supposed to be making a living counseling people on financial matters.  (Perhaps I should be quiet about the cottage.)

I've recently read three books that say the same thing in vastly different ways.

The first is "The New Coffee House Investor: How to Build Wealth, Ignore Wall Street, And Get On With Your Life" by Bill Schultheis.  To say that this book is fluffy is putting it mildly.  He's supposed to be inspirational as he gives you his simple message.  Hmmm.  I mostly just noticed a simple message.  Very simple message.  Really really really simple message.  "Save some money and put the stock portion of your savings in index funds."  I wish I could say that the 192 page book expands on that somewhat, but it really doesn't.  There are two pages in which he says, "Hmmm, you should probably get some bonds, too."  And there's one page where he says, "You might want to add up what you're spending now."  But then he talks about his golf game and his mountain climbing and how much he likes pumpkin pie and to sit with his friends and drink coffee in the coffeehouse.  His credential for writing this book is similar to Suze Orman's: he was a failed stockbroker who made a bunch of mistakes in his life and wants to tell you about them, possibly to help him feel less dumb.  I guess I could recommend him for anyone who would aspire to read Suze Orman but is put off by her aggressively X chromosomes.  Personally, I'm keeping it on my shelves because I like the pumpkin pie recipe he puts in it.


The middle version of this theme is "The Investor's Manifesto: Preparing for Prosperity, Armageddon and Everything in Between" by William J. Bernstein.  It's not too light and not too heavy, just right for most people.  It's a pro-indexing book that talks more about asset allocation and talks about the value of your human capital in your asset allocation, the annuity value of your social security and the value of delaying taking it. and about the burn rate you choose.

His idea of Armageddon is decidedly different than mine, though: he appears to mean the Dow might drop 30%.  He says, "Gold and gold stocks have also become an asset class du jour, with high recent returns and a good deal of publicity.  Unless you are going on the lam, buying gold bullion itself, gold coins, or an ETF that invests in them is rearely a good idea.  The long-term, real return of the yellow metal itself is zero - an ounce of it bought a fine men's suit in Shakespear's time, and still does today."  He says that like it's a bad thing.  I wonder how much a men's suit costs in Confederate Dollars?

The seriously heavy book is "Getting Started in a Financially Secure Retirement: Pre- and Post-Retirement Planning In a Time of Great Uncertainty" by Henry Hebeler.  Apparently Hebeler hung out in the coffeehouse with Bill Schultheis and got frustrated and wrote the book Bill Schultheis couldn't.  Oddly, the forward to this book is by Bill Schultheis and his two page forward has more actual content than Schultheis put in his entire 192 page book mentioned above.

The Hebeler book is really wonkish.  It keeps throwing in worksheets and annuity tables and references to websites and his own online worksheets.  It's *GREAT*.  This is the book I was waiting for, the one written by one of the smartest people I'll ever meet who just cast his attention to this subject when he got old enough to have it be his top priority.  (He has three degrees from MIT and spent his career being a rocket scientist and economic advisor on citizen advisory counsels.)

The only down side to this book is the sternness of his lecture.  He is really adamant that you aren't saving enough.  He doesn't know how much that is, but save more!  Much more!  Doom is coming!  No matter how much you plan it will NOT be enough, so step to it and do more!  Now!  It's a bit off-putting, really, except it comes from someone who actually *is* retired and reporting from the trenches.  He reports on the unexpected things in realistic ways. 

For example, one of the main threats to people's retirements is turning out to be their forty year old children who are out of work and asking for hand-outs from their "rich" parents who are only "rich" because they saved up so they could stop working for the next 30 years and probably haven't saved near enough.   Oh, and real estate taxes, utility bills and travel expenses to go see family are likely to be a lot more than you expect, too.  Not to mention medical expenses.  Which he does mention.  This man mentions everything.  How's your roof, he asks?  Got a replacement fund going for those 20 year shingles?

I kind of love Henry Hebeler.  I'm going to spend a lot more time with his website and then use this to teach my own clients.  I just have to figure out how to make the message sound a bit more fun, to inspire people to do this rather than drive them to it out of fear. 

I've also got the Boglehead guides I'm picking my way through chapter by chapter.  I like that about them: they are a series of articles that are well-written and well-edited on subjects I want to read on.  I have a couple of books by Jack Bogle but I find him annoying to read.  I much prefer the works of his acolytes.  Honestly, I wouldn't need to buy the books if I had an iPad and could just browse the webforums.  But I still read books.  Which, by the way, is why I get to make money teaching people this stuff.

Book Review: Ernst & Young's Personal Financial Planning Guide

The index has neither an entry for "inflation" nor "deflation".

I could say more, but that about sums it up.

Book Review: "Parlay Your IRA into a Family Fortune" by Ed Slott

I've been having a mid-life crisis of sorts regarding the value of tax-deferred savings.  I decided to go back and reread the "conventional" wisdom before I disrespect it in front of my clients.

Ed Slott is one of the foremost experts on IRAs in the country.  He knows every single nuance of how to milk an IRA to the absolute tip top tax advantage possible.  He speaks from the same perspective as I do as a CPA tax accountant, except he writes for Money Magazine and the Wall Street Journal and I write for, uh, you.

I have to admit, I learned a thing or two that I either never knew or forgot about the nuances of inheriting IRAs.  I'm glad I read this book as it is quite possible that I would be better able to advise clients regarding inherited IRAs after reading this.

My main problem with this book was that he lives in a bizarre world totally unlike mine.  In his world people have millions of dollars in their IRAs and the main problem they have is how to keep from having to take any of their money out of there so it continues to defer taxes.  In his world elderly parents die leaving their untouched retirement savings instead of living into their 90's in an $100K/year nursing home.   In his world IRAs make 8% on average after inflation every year!  (I want to visit that world!!!)

My clients almost never come to me to say, "My Mom left me $25K in an IRA, how should I best stretch that so that it grows tax deferred as long as possible?"  Instead, they come to me at tax time and say, "Oh, and I got this weird piece of paper I don't know what to do with from when my Mom died and I inherited some money from her." I try to teach them to call me first, but usually I lose any chance to fix it before they break it.

There are some occasions when converting an IRA to a beneficiary IRA and taking distributions over the lifetime of the beneficiary is a good plan.  I've got exactly one non-spousal person doing that right now out of 400 clients.   What I'm telling you is that it is a RARE problem in my world.

This book assumes as a basic premise of all these calculations that you do not actually need any of this money for any reason at all during your lifetime or even your children's lifetimes, or even... uh... ANYONE's lifetimes.  The whole point of the IRAs in this book is to defer the taxes for some unknown moment.  He shows chart after chart detailing the miracle of tax-deferred compound interest.  It really is a thing of beauty... if you don't take out the money.

In my world the moment actually DOES come when people need to access the money in their IRAs, and it almost always turns out to be paid at a higher tax rate than they have ever paid in their lives.   Traditional IRAs are a sweet kiss of a tax deduction when you're earning money, but they slap you harshly when you go to withdraw it under most real life circumstances.  I spend my time trying to convince people to STOP deferring taxes in years when they're in low brackets: convert to a Roth, withdraw it and buy tangibles, whatever: if you're in a 0% or 10% or even a 15% bracket now, what are you waiting for?

This book did not discuss what happens to you when you withdraw $100K from your IRA to buy into an assisted living center, how it makes your medicare be surcharged for being a "high earner" and how taxes phase in on your social security income or how it pushes your income into a higher bracket than you've ever been in during your lifetime.

Nor did this book discuss what happens when your only savings are in tax-deferred accounts and the inevitable happens and you need the money - because it is de facto your emergency account if that's the only place you have savings - and you end up being taxed at a higher bracket than ever before PLUS a 10% penalty.

Nor did this book discuss what happens when you put your money in a mutual fund with a 2% annual expense ratio and hidden fees of $2,000/year get siphoned off your income from your $100K nest egg.  Or what happens when you put it in a CD making 2% when inflation is 3%.

In fact, this book did not discuss in the slightest bit the effective tax rate after inflation decreases the buying power of your nest egg and yet you have to pay taxes on the nominal value, leaving you with less actual buying power than ever. 

Instead, Ed Slott works for the benefit of the governmentally-incentivized mutual fund industrv bonanza that is the modern IRA culture.

I'm not sad I read this book.  It was a good overview of IRA laws.  But it did nothing for helping me figure out how to plan for retirement.  What it did do was to remind me to go make sure my beneficiaries were updated and fully filled out on each of our retirement accounts.  That was nice.   If you have an IRA you should do this.  That's a good tip.

Here's another: don't buy this book unless you're deeply concerned with the burdens of dynastic wealth.  But if you happen to be sitting on IRA money you don't need, and/or you just inherited one you don't plan on using right away, it's worth taking out of the library.

Book Review: "The Great Depression Ahead"

Public Service Book Review: I read this crap so you don't have to  

Here's a quick review of a book that I got out of the library to leaf through.  I'll admit to having given it a shallow reading.

It's "The Great Depression Ahead: How to prosper in the crash following the greatest boom in history" by Harry S. Dent, Jr.  This is book is such utter crap that the fact that he's predicting a great depression is the most hopeful news I've heard in a long time.  The entire book is a series of discussions about Krondratieff cycles, with a whole lot of extra cycles thrown in: Presidential election cycles and Revolutionary Cycles and 5000 year civilization cycles... plus many more, overlaying each other in chart after chart.

He had sentences like, "Martin Luther came along at this point in the cycle"... as if Martin Luther were pre-ordained in the 5,000 year sine wave.  (And as if there *is* a 5,000 year civilization sine wave!)

He wrote this in 2007 and somehow missed issues like Peak Oil and monetization of the debt when discussing the next 70 years.

All in all, the man is an utter fool who spews 340 pages of bullshit before he quit nattering on.  Skip it and read Freakonomics instead.

LOL: one of the reviewers said, "Both AIM and Mass Mutual once had mutual funds based on the Dent philosophy and were sub-managed by him. Both have gone bust as being some of the worst performing mutual funds in recent history. If you followed his investment advise over the last 5 years you would be flat broke by now."

Book Review: "The Money Book for Freelancers, Part-Timers, and the Self-Employed"

A Money Book for Freelancers and the Self-Employed  

A friend mentioned that I ought to read something by Bogle so I trotted down to the library to fetch one the other day.   Our library didn't have any in stock so I ordered it through inter-library loan, but in the meantime I picked up a few books from the same section of the library shelves.

So I just finished reading "The Money Book for Freelancers, Part-Timers, and the Self-Employed: the only personal finance system for people with not-so-regular jobs."  It's a nice little book, compactly throwing in nearly every lesson I would want my clients to have as a foundation.  It talks about fixed monthly expenditures and how to get more aware of the monthly discretionary expenditures.  It talks about the need to address savings AND debt repayment at the same time while keeping in mind that quarterlies are a fact of life.  It talks about using cash in the envelope method but updates it to the 21st century with references to Get Rich Slowly,  mvelopes.com,  mint.com, irs.gov and online banks. 

I'm trying to think if I learned anything new from this.  Maybe just the link to mvelopes and that I could rename my IngDirect sub-accounts.  But that's sort of the strength of this book: there is no hook.  It's just the plain unvarnished truth laid out in a well-written readable fashion.  You have to set up your finances as a self-employed person in essentially this way, with very little variation possible.  Essentially, if you are not already doing this then you're doing it wrong.  This book could serve as mandatory financial literacy for anyone who has a variable cash flow.  As such, it could be enormously important to someone who hasn't figured this all out yet... like, say, anyone in business who doesn't happen to already be a financial advisor themselves.

I could find a few things to add to this, but nothing to take away.  And the things I could add are things that a reasonable editor might cut for brevity or to keep me from sounding too insane a Doomster.  But that's okay, this means that I can still add value to my clients even AFTER they've read the core of my teachings that this book neatly lays out.

Recommended for anyone who feels their finances are mysterious or out of control or who suffers from a variable cash flow.

Book Review: "The Road to Serfdom"

The Road to Serfdom: a review  

Lord Keynes is said to have quipped a response to Hayek's analysis of what happens in the long run: "In the long run, we're all dead."  Guess what?  You and I, Dear Reader, are not dead.  It turns out Hayek was right and Keynes was too short-sighted.

This book was written 70 years ago and is so devastatingly right in its predictions and analysis that it's stunning that it hasn't been more widely taught and read.  The only thing dating it is a lack of awareness of the Holocaust.  He keeps thinking Hitler is bad because he tricked a bunch of recently impoverished middle class people into joining a totalitarian socialist movement.  This sense of Hitler's wrongness, as the head of a National Socialist party, is not at all a sense that is understood by the liberal intelligentsia who make fun of fiscal conservatives for equating socialism with Hitler.  They scream "Godwin's Law" without ever understanding the central point: socialism leads to totalitarianism.  To order a socialist society you need to give someone (or some group) enormous power to dictate circumstances of an individual's lives.  It's just a hop skip and jump to "Arbeit Macht Frei" slogans over work camp gates or People's Communes.  (The wealthy and educated will need re-education on how to be sufficiently poor, of course.)

Hayek makes the case that economic prosperity and peace require a respect for Rule of Law and private property.  Rule of law, to quote Hayek: "Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand - rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one's individual affairs on the basis of this knowledge."  He then goes on to say, "It cannot be denied that the Rule of Law produces economic inequality - all that can be claimed for it is that this inequality is not designed to affect particular people in a particular way."  In other words, he advocates for equal opportunity, not equal outcomes.  He quotes Kant and Voltaire, "Man is free if he needs to obey no person but solely the laws."

The last 100 pages of the book is an in-depth analysis of what happens when good people decide to fix society by planning for equal outcomes.  There's a long section being very sad at how hoodwinked the German former middle-class have been by the concepts of socialism.  He plans for a future return to peace and prosperity after World War II, showing huge amounts of optimism considering this was written between 1939 and 1941, when the outcome was far from certain.

But the first 100 pages are straight economic philosophy, wisdom for the ages.  He is so well-read and brings so many things to bear that I feel like I've just done another graduate course in economics and political philosophy.  For example, one chapter revolves around Hayek's interpretation of de Tocqueville's quote: "Democracy and socialism have nothing in common but one word: equality.  But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude."  Don't worry, these are not trollish assertions.  He dives deep into every thought.  It took me weeks to get through this book.  I read it with a highlighter and a pen in my lap, alternately underlining sections and making notes in the margin.  This is meaty stuff, not the work of a Sunday Morning political pundit.

Another subject that had meat was "freedom."  He writes:

The coming of socialism was to be the leap from the realm of necessity to the realm of freedom.  It was to bring "economic freedom," without which the political freedom already gained was "not worth having."  Only socialism was capable of effecting the consummation of the age-long struggle for freedom, in which the attainment of political freedom was but the first step.  The subtle change in meaning to which the word "freedom" was subjected in order that this argument should sound plausible is important.  To the great apostles of political freedom the word had meant freedom from coercion, freedom from the arbitrary power of other men, release from the ties which left the individual no choice but obedience to the orders of a superior to whom he was attached.  The new freedom promised, however, was to be freedom from necessity, release from the compulsion of the circumstances which inevitably limit the range of choice of all of us, although for some very much more than for others.

Hayek understands the ones I call zombies very well.  Whereas I object because they can only hold one concept in their heads at one time, he refers to them kindly as "single-minded idealists".  Whereas I am frustrated because they never balance the costs of what they're asking against the benefits, he says, "In his anxiety to escape the irksome restraints which he now feels, man does not realize that the new authoritarian restraints which will have to be deliberately imposed in their stead will be even more painful."  He gets to the heart of it by sympathetically noting "that in a competitive society most things can be had at a price - though it is often a cruelly high price we have to pay..."  he then goes on to say that the appropriate person to determine which things you are willing to sacrifice in order to obtain other things, in other words, your specific values - is you.  But he understands that people don't want to make choices, they want only good and never bad.  "People just wish that the choice should not be necessary at all.  And they are only too ready to believe that the choice is not really necessary, that it is imposed upon them merely by the particular economic system under which we live.  What they resent is, in truth, that there is an economic problem."

There are some interesting things in the book about what I'd call "conservation of power", in the sense that you don't obliterate the power of the wealthy by giving it to the oligarchs, you just give the socialist planners the power instead.  He talks a bit about morals and how they are a matter of individual action, not corporate actions.  People behave much worse in corporate bodies than person to person, in essence.  He explores this subject a bit in relation to central planning issues, and made me think quite a bit about the way we view economic winners.  Writing around 1940, he says, "The younger generation of today has grown up in a world in which in school and press the spirit of commercial enterprise has been represented as disreputable and the making of profit as immoral, where to employ a hundred people [without coercion] is represented as exploitation but command the same number as honorable."

Hayek came to the same conclusion as I have regarding universal health care and safety nets in general: they need to be available for all, but at a very minimum level.  He refers to this as "security": 

It will be well to contrast at the outset the two kinds of security: the limited one, which can be achieved for all, and which is therefore no privilege but a legitimate object of desire; and absolute security, which in a free society cannot be achieved for all and which ought not to be given as a privilege ... These two kinds of security are, first, security against severe physical privation, the certainty of a given minimum of sustenance for all; and, second, the security of a given standard of life, or of the relative position which one person or group enjoys compared with others; or, as we may put it briefly, the security of a minimum income and the security of the particular income a person is thought to deserve.

Lest you not catch the issue here, it is impossible to give people the level of security a person thinks he deserves.  The best you can hope for is to give everyone some security against "severe physical privation."  Hayek diverges from Libertarianism here: he thinks that government DOES have a role to play in that baseline level of security, just as I do.  And he's thinking internationally, too.  You think you deserve two cars and air conditioning?  How do the workers in Laos feel about having to work 20 hours at their wages to get what you only have to work 2 hours to get?  Who says the First World standard of living (in 1939!) is the one that gets to prevail if equality of outcomes is desired?  He says, "Until I find a sane person who seriously believes that the European races will voluntarily submit to their standard of life and rate of progress being determined by a world parliament, I cannot regard [a push for world economic order] as anything but absurd."

Who should read this book?  Anyone who feels mystified and disenfranchised by the mysteries of the economic landscape in which we live.  This cuts through to the heart of it.  If you do this, that is what you'd expect.  We did this, and look, there that is.  This book BENEFITS from having 70 years of unveiling to credit it.

This man is SMART.  I mean, really, really smart.  My brain grew two sizes bigger this day.

Book Review: "Wealth, War & Wisdom"

Financial Wellness Lessons learned from WWII  

Confucius said, "Study the past if you would divine the future".  With that in mind, I've always been a fan of history.  I recall reading Greek comedies in high school and realizing that they were the same plot as Shakespearian comedies as 70's sitcoms.  People are people are people.  Study what people did in the past under various pressures and you can get a pretty good clue about what people will do under similar pressures in the future.

I've grown up in a situation that is almost unique in the history of the world: my hometown, my valley, has not been attacked since February 29, 1704.   We have had 300 years of not having our crops burned, not having our women raped, not having our animals slaughtered to feed a marauding troop.  Yes, we've sent our men away to war, but they didn't have to worry that their children were being murdered in their beds while they were away.  And when the men returned from war they weren't shot on sight by the conquerers.

We've come to think this is normal.

For a variety of converging reasons, I do not believe the United States is likely to keep this absurdly lucky privilege for much longer.  So, because my actual field of expertise is financial wellness, I've been thinking about how to preserve wealth in tumultuous times.

So recently I picked up a book at Border's: "Wealth, War & Wisdom: Surviving Today's Financial Armageddon" by Barton Biggs.  It's a strange little book: an amateur historian's version of WWII (and the Korean war) as told through anecdotes he's heard personally about how businesses did.  It's viewed through the lens of how the rich people managed in these trying circumstances.  He mentions, for example, Otto Frank's business tribulations without ever mentioning his children being murdered by Nazis.

With close up views of Churchill, FDR, Mussolini, Stalin, Hitler, and Hirohito, the real monster in this story is Stalin.  The author mentions several times how upset the German military command was that Hitler turned out to be criminally insane: they knew he was a bit off but hadn't counted on it working out that way.   He even explains the French in business terms: they wanted to unite against Stalin, even if that meant getting into bed with Hitler.  It makes sense when you read it from an economist's point of view.  Personally, I have trouble letting the part where he's a homicidal maniac slip into the background, but whatever.

I am woefully ignorant about the actual events of WW2.  I didn't know about the fall of Singapore or what happened at Midway or why we were marching around Bataan.  All I know about Korea is that they had mobile medical units with witty doctors.  (That part might be wrong.)  This book takes me through the various battles (I didn't know Dunkirk was in France!) and traces how it affected the stock market.  It was a long way around to tell his moral, but I benefited from the cultural knowledge about this basic history I hadn't ever read.

But the lessons are pretty quick to tell.

1.  Don't be there when the army comes through: either army.  Any army.  Get out.  Particularly if you're rich, particularly if you're part of a minority group.  Leave.  Leave now.  Even if you can't find a buyer for your business, leave leave leave.  Leave.  And, by the way, have parked some money and/or land in a place that you're heading to that you (or your descendants - let them know how) will be able to access.  The time to set this up is BEFORE invading armies start tromping through.  This isn't just for rich people, by the way.  If you had 30 minutes notice that you need to hit the road do NOT spend that time in line at the ATM machine or gas station.  Keep cash in your house and gas in your car at all times.  Becoming a refugee is a normal part of human existence and we've been absurdly lucky to have skipped it so often in this country.

2.  Be invested in equities, preferably in index funds.  Government bonds return abysmal real returns over the long term in winning countries.  They return negative real returns in losing countries.  Equities reliably produce real returns over the long haul, but no one stock ever has (except G.E.).  Don't go for blue chips, go for index funds that change what is in the index from time to time.

3.  Buy productive land.  Wood lots or agricultural land nearly always retain title and value.  Houses turn out to be depreciating assets and you won't be able to collect rents in many cases - and in some cases you will be killed for trying to - but owning the land UNDER the buildings ends up being okay because when the chaos stops (as it will, because it turns out that killing all the productive people is a bad idea in the long run) then the title to the land will revert to the owner (or his descendants.)

4.  Have jewelry and warm clothes and cheap luxuries: booze, cigarettes, chocolate to barter for food.

5.  Bury gold in your back yard.  Don't leave it in a bank, as the bank can and will have the safe deposits seized.  Pretty much first thing.

6.  Art is nice for making refugees remember the glories of their old homes.  Knick knacks work just as well.  Emotional attachments to pretty things are normal, but don't make them an investment strategy.

7.  Diversify your holdings as to asset classes AND location.  Having all your money in a savings account at your local bank is just as risky as having it all invested in S&P 500 stocks.

Book Review: Pay It Down

Jean Chatzky's take on debt  

This was a quick read from the library: Pay It Down: From Debt to Wealth on $10/day by Jean Chatzky.   The  book is abbreviated and condensed into this series of articles on Money.cnn.

First off, this book is nearly entirely about budgeting.  Figure out what you're already spending, and then take a look.  The topic was just as dreary as it could be in this relentless little book.  It would not let you escape the reality that you're going to have to spend less than you earn if you want to pay off debt.  No bright promises of riches, no assurance that this will be easy, nothing but the drilling down of a determined accountant.  This was a root canal.

If, however, you need a root canal, better to get one than to be given a tube of teeth whitener.  This book has me headed over to my spreadsheet to see if I can't set up a budgeting tool to use with my clients.  I've got one coming in tomorrow I can try it out on.

There was some good stuff in there about how to find places to cut in your budget, some of which would be worth the price of this book if you were fairly new to this.  Short version: sell things you own that you can't afford to own and go get a second job.  (Uh, did I mention that most of this book was dreary?)

I also appreciated her take on ways to improve your credit score.  It was more specific than I've seen before.  She said:

35% of the score is based on how well you pay your bills on time.  One late payment can drop your score by 20 points!
30% is based on "balance and burden", where they want you to have a lot of available credit you're not using.  (This indicates that someone checked your income at some point.
10% is based on whether you've had new inquiries.  All inquiries in the same 15 day period count as one inquiry.  Inquiries over 12 months old don't count.
10% is financial composition: what percentage is bank-card debt and what percentage is installment debt.  They prefer a ratio of 60-70%bank card debt to 30 to 40% installment debt rather than you have too much of one or the other.  I'm not sure what "installment debt" is: the only kind I've seen on my credit report are student loans and they're all paid off.  I can't see how that hurts me, but apparently it does a little.
15% is based on the average age of your credit cards.  It's best to keep cards for a long time and not close them.

She had some interesting notes on health insurance, too:

She suggests looking at eHealthInsurance.com and Fortis Health for quotes on health insurance policies.  (She noted that medical expenses were the leading cause of people getting into trouble with debt, and any solution has to involve getting health insurance.)

She quoted some figures for health insurance costs that were roughly 1/2 of what I'd expect to pay and it sent me scrambling for the copyright date on this book.  My guess is that it was written five years ago.  Could health insurance rates have doubled in that time?  It seems unlikely, but possible.  Nevertheless, the point is the same.  People need to be prepared to seek out their own policies, just as they seek out their own life insurance, car insurance and possibly disability insurance.

In Massachusetts, though, I'd recommend that you start with the Commonwealth Connector if you're trying to find health insurance.  I tried out eHealthinsurance.com and it said it didn't work in my zip code.  I suspect it wouldn't work in any of MA.

She also mentioned that you can search for insurance agents in your area through the National Association of Health Underwriters and review health insurance companies at the National Association of Insurance Commissioners'  and/or the National Committee for Quality Assurance sites.

Book Review: Richest Man in Babylon

"The Richest Man in Babylon", or "Wisdom Through The Ages"  

I had originally meant to review both financial books I've just read in the same post, but The Richest Man in Babylon by George S. Clason  deserves its own review. It's a slim volume and the copyright is expired so I will make this easy and link to a PDF you can download. There. Consider yourself led to water.

Have you ever noticed how movies set in the seventies seem dated, but if they were set in the distant past they don't? For example, compare "All The President's Men" to "Butch Cassidy and the Sundance Kid". Point is, if you put something back in time it stays fresh. The author, George S. Clason does this by setting his lessons in the ancient times of Babylon. The language is vaguely King James-ish but it's not hard slogging once you listen to his voice. He's amusing and immediate, actually. This is one of those classics that is a classic exactly because it's worth reading.

The rules themselves are self-evident. The parables that illustrate the rules are what inspire you to adopt these rules for yourself. It's like learning that the way to fat loss is to eat less and exercise more. It's not enough to KNOW that, you've got to visualize integrating it into your life, you've got to make positive steps to make it happen, you've got to actually DO it. This book is helpful with THOSE pieces.

Nevertheless, I'll tell you the rules just because I want them in my notes.

Don't be a slave, use determination to get out of debt in three easy steps

1.  Stop living on the edge and get some savings.  "First, the plan doth provide for my future prosperity.  Therefore one-tenth of all I earn shall be set aside as my own to keep."

2.  Budget to live on 70% of what you bring in. "Second, the plan doth provide that I shall support and clothe my good wife ... Therefore seven-tenths of all I earn shall be used to provide a home, clothes to wear, and food to eat, with a bit extra to spend, that our lives be not lacking in pleasure and enjoyment. But he doth further enjoin the greatest care that we spend not greater than seven-tenths of what I earn for these worthy purposes. Herein lieth the success of the plan."

3.  Put together a payment plan with 20% of your earnings and start someplace.  Anyplace.  Just get started.  "Third, the plan doth provide that out of my earnings my debts shall be paid.  Therefore each time the moon is full, two-tenths of all I have earned shall be divided honorably and fairly among those who have trusted me and to whom I am indebted. Thus in due time will all my indebtedness be surely paid. Therefore, do I here engrave the name of every man to whom I am indebted and the honest amount of my debt.  I visited my creditors and explained to them that I have no resources with which to pay except my ability to earn, and that I intent to apply two tenths of all I earn upon my indebtedness evenly and honestly. This much can I pay but no more. Therefore if they be patient, in time my obligations will be
paid in full."

LO, MONEY IS PLENTIFUL FOR THOSE WHO UNDERSTAND THE SIMPLE RULES OF ITS ACQUISITION
(Seven Cures for a Lean Purse)

1. Start thy purse to fattening.  For each ten coins I put in, to spend but nine.

2. Control thy expenditures.  Budget thy expenses that thou mayest have coins to pay for thy necessities, to pay for thy enjoyments and to gratify thy worthwhile desires without spending more than nine-tenths of thy earnings.

3. Make thy gold multiply.  Put each coin to laboring that it may reproduce its kind even as the flocks of the field and help bring to thee income, a stream of wealth that shall flow constantly into thy purse.

4. Guard thy treasure from loss by investing only where thy principal is safe, where it may be reclaimed if desirable, and where thou will not fail to collect a fair rental. Consult with wise men. Secure the advice of those experienced in the profitable handling of gold. Let their wisdom protect thy treasure from unsafe investments.

5. Make of thy dwelling a profitable investment.  Own thy own home.

6. Insure a future income.  Provide in advance for the needs of thy growing age and the protection of thy family.

7. Increase thy ability to earn.  Cultivate thy own powers, to study and become wiser, to become more skillful, to so act as to respect thyself. Thereby shalt thou acquire confidence in thy self to achieve thy carefully considered desires.

THE FIVE LAWS OF GOLD

 The First Law of Gold
Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.

"Any man who will put by one-tenth of his earnings consistently and invest it wisely will surely
create a valuable estate that will provide an income for him in the future and further guarantee safety
for his family in case the gods call him to the world of darkness. This law always sayeth that gold
cometh gladly to such a man. I can truly certify this in my own life. The more gold I accumulate, the
more readily it comes to me and in increased quantities. The gold which I save earns more, even as yours will, and its earnings earn more, and this is the working out of the first law."

The Second Law of Gold

Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.

"Gold, indeed, is a willing worker. It is ever eager to multiply when opportunity presents itself.
To every man who hath a store of gold set by, opportunity comes for its most profitable use. As the years pass, it multiplies itself in surprising fashion."

The Third Law of Gold
Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.

"Gold, indeed, clingeth to the cautious owner, even as it flees the careless owner. The man who
seeks the advice of men wise in handling gold soon learneth not to jeopardize his treasure, but to preserve in safety and to enjoy in contentment its consistent increase."

The Fourth Law of Gold
Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.

"To the man who hath gold, yet is not skilled in its handling, many uses for it appear most
profitable. Too often these are fraught with danger of loss, and if properly analyzed by wise men, show small possibility of profit. Therefore, the inexperienced owner of gold who trusts to his own judgment and invests it in business or purposes with which he is not familiar, too often finds his judgment imperfect, and pays with his treasure for his inexperience. Wise, indeed is he who investeth his treasures under the advice of men skilled In the ways of gold."

The Fifth Law of Gold
Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.

"Fanciful propositions that thrill like adventure tales always come to the new owner of gold.
These appear to endow his treasure with magic powers that will enable it to make impossible earnings.  Yet heed ye the wise men for verily they know the risks that lurk behind every plan to make great wealth suddenly."

There are quite a series of parables.  Other morals crop up:

MEN OF ACTION ARE FAVORED BY THE GODDESS OF GOOD LUCK

BETTER A LITTLE CAUTION THAN A GREAT REGRET

WE CANNOT AFFORD TO BE WITHOUT ADEQUATE PROTECTION

WHERE THE DETERMINATION IS, THE WAY CAN BE FOUND

'Thou can't get ahead by shirking,' Megiddo protested. 'If thou plow a hectare, that's a good day's work and any master knows it. But when thou plow only a half, that's shirking. I don't shirk. I like to work and I like to do good work, for work is the best friend I've ever known. It has brought me all the good things I've had.'

This book was originally published in the high-flying days before the Great Depression.  It is worth reading at least once and won't take too long.  If you know all this stuff already it will re-enforce it.  If you don't know this then this sort of information can save your life in hard times and make it easier in good times.  That's as strong an endorsement as I've ever given a book.  A free book.  That I linked to.  Drink up!