Investing Made Simple

Investing Made Simple: Index Fund Investing and ETF Investing Explained in 100 Pages or Less

By: Mike Piper (ObliviousInvestor.com)

I had the opportunity to meet Mike at the first FINCON in Chicago last year.  He’s a thoroughly nice guy.  I knew him from his blog and website, but for some reason I hadn’t known the extent of his authorship.  I found out at FINCON that he’s written several books (9 of them if I count right) on personal finance.  They mostly lean towards the topics of investing, but even encompass Social Security and business structure.  After meeting Mike, and learning about his books, I made it a point to pick one of them up to read and review.  Well, over a year later, I finally made it to the reading and reviewing part.

Since I’m not much of an investor, I thought that it would be a double good idea to pick up the Investing Made Simple title he wrote.  I can review something he’s written, while probably learning a few things along the way.  Investing made Simple is an excellent book.  It’s short, which makes it an easy read, and the writing style is light, without all the technical investing jargon that’s typical to an investing book.

It’s not an in depth book on investing, but it wasn’t intended to be.  What it is intended to be is a short (100 pages or less) book that will give anyone the basics of investing while setting them on the right track to a successful investing portfolio.  I think he accomplished that.

I think one of the things that many beginning investors, including myself, get bogged down in is that the world of investing is a pretty big world.  There’s all these different ways to invest in something.  There’s shorts, longs, calls, margin, options, commodities, ETF, bonds, and the list goes on.  And on.  But, when the beginning investor, who knows little to nothing about investing goes looking for information to get them started, it’s a whole lot of overwhelming.  Piper lays it out simple and easy.  He gives you the meat of what you need to successfully invest for the long term, while quietly informing you that you’ll likely be better off ignoring most of the  stuff that’s confusing you.

What you end up with is a book with all the basics of investing in a small package.  But, you also end up with something that, for most people, is also a complete investing manual.  Keep it simple, and invest wisely is the order that I took away from reading Investing Made Simple.  I think it should be recommended reading for all beginning investors.

 

Capitalism Requires Participation

I recently had a small discussion on Facebook with Glen, of Free From Broke.  It started when he mentioned in his status that he had been at the doctors office waiting on his appointment for 44 minutes.  He asked if he should just say to heck with it and reschedule the appointment.  I suggested that he wait it out, then send the doctor a bill for his time spent waiting.  Most people, when I make a similar suggestion, think that I’m joking.  That’s only half true.  I honestly think that if you’re waiting for a long enough time, you ought to send a bill.  I’m not the only one, either.  Check out this article, and this one on CNN.

Now, I’ll be completely honest.  I’ve spent plenty of time waiting on doctors, dentists, and the DMV.  I’ve never once sent a bill.  I’m chicken.  :)  Really, I think that we’re preconditioned to expect that we’ll wait for a doctor, and since we’re paying them for the service, and we need the service, we don’t dare rock the boat.  But, there’s a couple of good arguments against that being true.  The biggest of which is that capitalism requires participation.

An economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.

Merriam-Webster

Capitalism and the Free Market

In particular, I’d like to point out the last part of that.  “determined mainly by competition in a free market”.  What drives that competition, and as a result, the free market?  The law of supply and demand.  In the law of supply and demand, the prices of goods and services are determined by the supply that exists for a good or service, and the demand that exists for that same good or service.  If demand is high for something, and the supply is low, or limited, the people who have the supply can charge more because the ratio of supply to demand is higher.  But, what about something like a doctors visit?  Doctors aren’t exactly in a low enough supply to warrant higher prices.  While our insurance companies are able to negotiate cheaper prices for services with a doctor, we very rarely will even ask if there’s a better rate.  And, we’ll willingly sit in a waiting room for extended periods of time, which, anyone familiar with the concept of time cost will tell you, costs money.

Participating in Capitalism

In order to change that status quo, we need to start participating in our capitalism.  The clinics and hospitals that many of the doctors work at are requiring their doctors to schedule appointments in 15 minute or 30 minute increments.  How many times have you gone to the doctor and spent more time than that in the exam room?  I know I probably do at least every other time.  Obviously, that’s not a very efficient way to schedule the time.  But, they do it so that the doctors can squeeze in as many patients as possible.  It’s ruled by profit.  The more patients a doctor sees in an hour, the higher the profit is for the clinic.  They’ll never change that unless the profit starts to go away.  How does the profit go away?  Well, either the doctors become so expensive that they’d have to see many more patients in a day than physically possible (they’d just raise rates), or they start getting bills for the patient time they are wasting.

If patients begin billing for the time they spend in a waiting room, eventually, it becomes more expensive to keep patients waiting than it does to change the way they schedule appointments.  Consider the last time you had cable hooked up in your home.  You likely called the cable company to set up an appointment, and they gave you a 4-5 hour window when the technician would be there.  What if you then told them that your time is valuable to you, and that they can expect a bill for every half hour past the beginning of that window that you’re kept waiting on the technician?  Do you think he’d make you wait the full 5 hours?  Not very likely.

The prices of goods and services, including the time those services take to perform, are determined by what the market will bear.  As long as the market continues to pay the cost of the goods or services, the provider can continue to charge that price.  Sometimes they’ll start increasing it.  But, when we begin to value our time, and hold service providers accountable for the cost of time wasted waiting on them to perform a service, we can begin to tell those providers that the market will no longer bear the cost of lost time.  In short, we begin to participate in the free market economy we call capitalism.

Would you ever bill a service provider, doctor or otherwise, for time spent waiting on them?  If not, is it because you don’t value your time, or because you believe that the service provider is truly doing all they can to proved the best services?  Is the service providers time more valuable than yours, and that’s why you won’t bill for your time?

img credit: mishra-ajay, on Flickr

Are Certificates of Deposit (CDs) Still a Valuable Tool?

Read just about any personal finance article on saving and you’re likely to also read something about certificates of deposit.  Heck, I’ve covered what a certificate of deposit is, how to create a CD ladder, and mentioned CDs several other times.  But, as much of a mainstay as they are in the typical savings mantras, are they still a valuable tool for savings?

Recent economic changes have certainly not been kind to many of us, and our methods of savings haven’t been treated well either.  The interest rates on savings accounts is terrible.  My local credit union doesn’t pay enough to even make it worth my while.  And online savings banks that used to be the poster children of high-yield accounts are paying less than 1%.  It wasn’t that long ago that a 5 year CD would have been paying 6-7%.  Now?  Closer to 1%, even at the online banks.  My local credit union is paying 0.25% on a 12-month.  (they apparently either don’t offer  5 year, or they don’t post the rates for them)

There are still some good rates out there though, if you take the time to look.  Well, better rates than what some are offering.  In the current economic situation, you can’t ask for much.  Click here to read more information on one such certificate of deposit.  But, even with rates that are closer to 2%, are they worth your time?  If we assume that the rate of inflation is somewhere around 3%, (I think it’s higher) aren’t you losing money by only earning 2% on the CD?  Yes and no.  If the money would just be sitting around in a savings account and making little to no interest, the CD at near 2% would be better than nothing.  Literally.

So, back to the question at hand.  Are CDs still a valuable tool for savers?  The answer, again, is yes and no.  No, because they aren’t the best tool.  There are other ways for you to make your money work for you.  They all make better returns than you would with a CD.  However, they all carry some caveat that you have to know about if you’re going to use them.  In many cases, the risk is higher.  Investing the money in stocks, or in something like Lending Club can get you much higher returns, but the risk is also much higher.  Investing the money into real estate, while a good passive income idea, is also a higher risk investment, plus the money is locked away in a non-fluid investment.  Treasury bonds can have higher returns, but often only at the cost of tying the money up for a long time.

If there are so many higher yielding investments to make, why are CDs still sometimes a valuable tool for savers?  There’s two really good reasons.  The first is that the money is not tied up for very long.  Even if you purchase a 5 year CD, you can still cash the CD out and only pay a small fee.  That fee is usually something like 3 months of interest.  As long as you’ve held the CD 3 or more months before cashing it out, you don’t lose any money.  So, the money remains pretty fluid.  The second reason is that a CD is an ultra secure investment.  That’s also why the rates are lower.  A CD is what is called a secured investment.  You deposit (hence it’s name, certificate of deposit) an amount of money into the account, and agree to leave it there for a certain period of time (the term of the CD) in exchange for a guaranteed return rate.  There’s very little risk at all.  Even if the bank you open the CD at goes bankrupt, you’ll be covered by the FDIC or NCUA insurance.

While I wouldn’t suggest putting a huge chunk of your retirement into CDs, (unless you’re nearing retirement) I would suggest putting something like your emergency savings into them.  They’re also a good tool for squeezing a bit more interest out of a new car savings, or a similar savings that has a mid-range use date. Just pick a CD with a term shorter than the length of time you’ll be saving up to avoid any extra penalties.

CDs don’t offer the greatest rates, that is for sure.  But, their lack of risk, and higher fluidity make them great for short and mid range savings.  And that makes them a mostly valuable tool for savers.  You just have to know where and when to use them.  Just like any other tool.

Do you agree?  What savings would you use a CD for?