Simple Minded Investor

You aren't smarter than the market. It really is that simple. One of the interesting aspects of the recent collapse in stock values is that it makes it a good time to consider rolling your traditional IRA over into a Roth IRA and paying the taxes on the lower valued stock before they go back up. Of course, that assumes they will go back up before you retire. For people who don't pay attention to this sort of thing, the basic difference between a Roth IRA and a traditional IRA is how you pay taxes on them. With the traditional IRA you put your money in an account for retirement and you don't have to pay any taxes on it. Or, looked at another way, you can deduct the contribution from your income taxes. You also don't have to pay taxes on any of the earnings from the investment while they accrue. But when you go to take money out of that account, you have to pay income taxes on the money you withdraw just as you would any other income you had earned. So, while you save mon...

You aren't smarter than the market. It really is that simple. This article in the New York Times, You Try to Live on 500K in This Town , makes it easy to make fun of the perils of having to live on only the $500,000 Obama is suggesting be the limit for executives of failing banks who take federal dollars. But there is really something far more disturbing in the discussion as it takes place throughout the newspaper. It becomes apparent that there is the sense that even if you have lost trillion's of dollars of other people's money, you are still entitled to live an extravagant lifestyle. Having left thousands of people losing their homes, jobs and feeding themselves at food banks, these people genuinely don't see why they would ever have to suffer the same fate. In 1929, wall street losers jumped out of windows. They understood that there was nothing to insulate them from their fate. Today's financiers have no such belief. And with good reason. One of the reason the...

You aren't smarter than the market. It really is that simple. The real estate industry is putting on a full court press for the notion that real estate is now a bargain. But the reality is that housing prices still have a long way to fall before they reach historic norms. And there are plenty of reasons to wonder even once they hit those norms, whether that will be the bottom of the market. The bad economy, huge amounts of other consumer debt, the tightening of credit and the hangover from the binge of new houses built at the height of the bubble would all argue that the immediate future is likely to see prices stay well below those historic norms for several years even once the current price bubble has fully deflated. So if you are renting and thinking about buying, you are probably better off waiting until at least 2010 and probably 2011. Buy now and it may be 5 years or longer before your house gets back to the current price you paid for it. On the other hand, if you already ow...

You aren't smarter than the market. It really is that simple. ---------- Update: Here is an article about Yun's predecessor essentially admitting his job was "spin". ------------- Is Lawrence Yun, the Chief Economist for the National Association of Realtors, really an economist? No, I don't mean does he have a degree and training in economics. I assume that he does. The question is what services of an economist does the National Association of Realtors provide. In case you haven't noticed Yun before, it seems every time there is an article about the housing market in the New York Times, Associated Press and other media, Yun appears with his usually rosy prognosis of the future of real estate. That is not surprising, given who he works for, but it is not really the job of an economist. Its the role of a PR flak who is delivering the message that suits his employers. I suspect the job title of "economist" is also a part of that message. Afterall, id...

You aren't smarter than the market. It really is that simple. The recent stock market crash has reminded many people that there is risk associated with buying stock. But that is really the wrong lesson for people to learn at this point. What the crash has shown is that the stock market is volatile, it will go up and down. But how much risk that creates depends on your investment horizon. If you plan to hold on to your stock for another ten years, then the recent crash has few consequences. The price in the current uncertain market says very little about the price you will get ten years from now when you sell the stock. In fact, the stock markets' hourly gyrations have very little import for most investors, regardless of their investment horizon. Volatility is relative. Monthly fluctuations have consequences for short term investors. The decline in market prices since July reminds us why we shouldn't own stock that we will need to sell in a couple months for our immediate li...

You aren't smarter than the market. It really is that simple. The media is filled with plain silly inanities these days as everyone is focused on the crisis du jour on wall street. Here is one that grabbed my eye: "The Depression itself was a dynamic sequence. It wouldn't have happened if the Fed hadn't insanely tightened credit in response to the stock market crash, rather than the correct policy of easing interest rates." First, that monetary policy lead to the depression is a highly controversial explanation favored by money-supply ideologues. But the Fed did not have a policy of "tightened credit". They simply couldn't expand the money supply by printing dollars because, at the time, each dollar had to be backed by gold bars at Fort Knox. Where the government did act to make the problem worse was cutting federal spending in response to reductions in tax revenue. Essentially the folks in charge ran government like a business, cutting expenses in r...

You aren't smarter than the market. It really is that simple. There have been several articles lately that I suspect are part of a determined effort by the real estate industry to get people back into the housing market. The basic pitch is that higher interest rates will eat up any savings you get from waiting for lower prices. Even the New York Times has gotten in on this action. The calculation always goes something like this. Say you have a house for 500,000 and you make a $100,000 down payment today with a $400,000 mortage at 6.5%. Now compare that to a year from now if housing prices fall by 10%, you would make a down payment of $90,000 and borrow only $360,000, but at a higher interest rate. If the interest rate is high enough, you will end up with higher payments and paying more total for the house than if you purchased it now. There are two problems with that calculation. The first is that isn't really how people buy houses. People decide how much they can afford and th...