economy — Beating Broke

Are We Too Confident in the Stock Market?

August 22, 2018 By Shane Ede 4 Comments

Experts are fond of telling us all about the historic returns of the stock market. But, does our belief in that make us overconfident in the stock market?

You’ll have a hard time finding someone who won’t tell you that the market performs quite admirably over time. It may have it’s ups and downs, but it performs at a rate that touches on double digits for longer periods of time. And, it’s hard to argue with the facts. Take the market for any given 10 or so year period and you aren’t likely to find too many periods where it hasn’t returned a pretty nice rate. Especially when you compare it to the rates of savings accounts and CDs over the same period.

But, there’s shady side to all of that. Our confidence in the ability of the stock market to return those kinds of numbers can sometimes cause us to over-invest our portfolios. Every time the stock market drops significantly (or crashes altogether) we hear stories about the person who was near retirement and now has to work for another 10 years because he/she lost it all in the stock market drop. Invariably, you hear one of the reporters utter something about whether the stock market is as safe as we all make it out to be.

Charging Bull And the truth is, no. It’s nowhere near as safe as some would make it out to be. In fact, it’s down-right risky. And the less diversification you have, the riskier it becomes. Hold all your money, or a significant portion of your portfolio, in one stock and you’re just as likely to suffer a tragic loss than you are to retire rich. Ignore the more conservative professionals who suggest that you should move more and more of your money away from stocks and into something like bonds as you age, and you have a much higher chance of suffering a tragic loss.

Our confidence isn’t entirely misplaced, however. The facts remain that the market does return a healthy rate over time. And as long as you can weather a few down trends, you’re likely to come out on top if you just hold on for the ride. The overconfidence comes when you keep your money in too high of a percentage of stocks as you near retirement age. By the time you are 10-15 years from retirement (about age 50-55) you should have moved at least 50% of your portfolio away from stocks and into bonds. Your investment adviser should be able to help you with that, or you should sign up with a stock advisor service (like the Motley Fool Stock Advisor, or Betterment). When you’re 5 or so years from retirement, you should be closer to 90% in bonds and other safer investments. Yes, these investments are less likely to have high returns, but they also are almost guaranteed to return something. And, as the old saying goes, something is better than nothing.

The bottom line is this. Be aware of the risk of the stock market and that you should begin playing it safer as you near retirement age and you should be ok. Don’t get overconfident in the history of the stock market and it’s giant returns. Most importantly, find an investment adviser that you can trust and, at the very least, get their advice on your portfolio and it’s allocations, and you should find yourself hitting retirement with most of the money you expected to be there.

Image Credit: Charging Bull by kdinuraj, on Flickr

This post originally appeared on Beating Broke on 10/25/2010, and has been refreshed.

Keeping Up With the Smiths

April 15, 2014 By Shane Ede 10 Comments

Keeping up with the Joneses is bad. We know that. From a financial perspective, we spend a great deal of our time overcoming the green monster called envy in order to keep our lives in some semblance of financial order. We know the Joneses down the street with their big, fancy new SUV. We see them going on long family vacations. And we know the guy that mows their lawn. But, we also know that there’s a pretty high probability that they still owe a ton of money on that SUV. That that family vacation likely was financed through a credit card. Their entire financial life depends on them keeping their well-paying jobs.

Forget the Joneses

I’d like to talk about another family. The Smiths. You don’t know them. We don’t talk about them like we do the Joneses. Why don’t we? Because, outwardly, their lives are nothing to be envious of. They don’t own a big house on a double lot. They don’t drive a brand new Escalade. Their family vacations consist of weekend trips to state parks or trips to visit family a couple of counties over. Outwardly, they may even seem a bit downtrodden. They may seem (GASP!) a bit poor.

Sometimes they are. Sometimes, they are truly victims of their circumstance, or their poor financial choices along the way. But, for every one of those families, there’s at least two that aren’t poor. They have well paying jobs. They have money in the bank. And they occasionally barbeque a steak on the cheap grill they have on their back deck. It’s those Smiths I’d like to talk about.

It’s the Quiet Ones You Have to Watch Out For

Why don’t we know the Smiths? Because we live in a society that is enamored of our celebrity. We hang on every word that that famous athlete, or famous actress says. We try and model our lives after theirs. They live a glamorous life, full of flashing photography, red carpets, and any number of endorsement deals.

Who wouldn’t want to be like that? Short of being famous, we decide that we’ll see how close we can get. The bank doesn’t turn us down for that big house, big car, or vacation to the same beach that the celebrities hang out on. Maybe we’ll even get to see one of them!

But, it’s the Smiths we should know. We should know people who live their lives responsibly within their means. We should know people who live for more than having our fellow neighbors think about how rich we are, and how rich our lives must be. We should be the Smiths. We should be the people who drive the reliable older car without the flashy rims and booming sound system. We should be the people who live in the smaller house that we try and repair ourselves.

Society may push us towards that Joneses sort of lifestyle. After all, what would become of some of the companies if we stopped trying to keep up with the Joneses and stopped buying all their luxury goods? What would the news and tabloids cover if we weren’t constantly buying their rags in order to find out what sort of clothes the princes and princesses of some foreign country were wearing this spring?

Shiny Facades, Crumbling Foundations

All around us, there are Smiths. We don’t notice them, and we rarely get to know them. We’re surrounded by the Joneses, and the shiny facades of businesses and economies that are driven by their reckless spending. But, under those shiny facades is a crumbling foundation. The economy of the world is on shaky ground. We saw just how shaky it really was in 2008. When the housing market crashed, it very nearly brought the entire world economy with it. Luckily, the economy was strong enough at the time to take a beating. It wasn’t strong enough to bounce right back. It’s been a long slog back to where we were. We aren’t even back there yet. There are still parts of the world that are hurting economically.

Imagine, for a moment, if we rebuilt that economy, not on the sands of bailouts and extended unemployment benefits, and instead built it on the bedrock of hard work and frugality that got us where we were in the first place. Imagine if we had seen the folly of our loose spending ways and tightened our belts, stuck to our budgets, and started building an economy that doesn’t shake and quiver at the smallest rise in unemployment, or the slightest miss in an earnings report?

What if, instead of running around willy-nilly chasing the lifestyle of the Joneses, we were calmly working ourselves into the stable economy of the Smiths? What if we all didn’t have wait for our next paycheck to buy gas because our last paycheck went to our mortgage and car payments? What if we were able to fill a tank of gas from the cash in our bank account and know that we still had our emergency funds to help us along should a real emergency come along?

We can. We can bring our spending in line with our earning. We can sell the fancy car that we don’t need. We can downsize our house to something that we can afford. Sure, the dependable used car you buy might not have as much chrome as the fancy one. It might not have the same heated seats. And the house you downsize to might not have a walk-in closet, or a jacuzzi bath tub. I’ll let you in on a little secret. You don’t need them. They’re luxuries. You only think that it’s normal to have those things because the Joneses told you it was.

We should be keeping up with the Smiths.

We can be the Smiths.

Is the Living Wage Realistic?

March 21, 2014 By Shane Ede 6 Comments

I recently found an interesting calculator (Via Lifehacker, via MIT), called the Living Wage Calculator. The smart folks over at MIT put it together to”provide a minimum estimate of the cost of living for low wage families.” Normally, when I see one of these calculators, I try it once, scoff lightly, then move on to something far more useful with my day. This calculator is a bit different from some other ones I’ve seen in that it actually gets pretty localized. Others tend to use a generalization like “urban” or “suburban” and leave it at that. The fault there is that the living wage in an urban setting like Los Angeles is going to be very different from a living wage in the urban setting of a city like Fargo.

The MIT living wage calculator gets localized down to the county you live in, and then goes a bit further and can go right down to the city that you live in in some cases. I gave it a run based on my county, and then based on my city. Not surprisingly, I got the same number in both cases. The city I live in is both the county seat, and the largest city in the county. I suppose it’s possible that the numbers could vary a bit at the two levels, but I don’t think it would be too much in any case.

A Living Wage: Example locations.

To compare how the results fare based on your actual location, I ran it for a few different locales. First, using the example above, for Los Angeles city. In all cases, I used the 2 adult, 3 children number. For Los Angeles, the calculator returned an hourly wage of $27.97 which translates to just a hair under $58,200. (using $/hr * 2080) For Fargo, the calculator returned an hourly wage of $20.56 which translates to about $42,800 a year. To be honest, I was a little surprised by the small difference between the two. Not that almost $16,000 is a small amount, but considering the difference in the size of the two cities, I really expected the living wage to much more significantly different.

For a second example, I compared Fargo against the city that I live in. The numbers for Fargo are above. For my city, the calculator returned an hourly wage of $19.20 which translates to about $40,000. This difference was a bit more expected. The two cities are only a couple of hours away, and their economic differences are pretty minimal. I also got curious and looked up what it would spit out for a living wage for New York City (Queens County). There, it estimates the living wage at $26.12 an hour, or about $54,300 a year.

I found it somewhat interesting to dig into how they were calculating the living wage. They’ve estimated some of the expenses for an average family of a certain number of adults and possible children. Based on our own expenses, I think it’s safe to say that some of them are a little low. They’ve also assumed that any 2 adult family with children is a one-income family with no childcare expenses. In fact, I’m not so sure that they aren’t saying that a 2 adult household with no children would be a one-income family.

Given all of that, it was a bit reassuring to know that our family makes more than what they’re assuming is a living wage for our area. However, that’s with two incomes. Which also means that we’re spending plenty of extra on child care. If I use their numbers for expenses for 2 children and childcare, then add it to their 2 adult, 2 children number the resulting number is not that far from what we’re really making. There’s still a bit left over above that amount, but it’s a bit of a reality check too. Time to find some ways to increase income!

A Living Wage: Is it Realistic?

All the playing around brings a question to mind. Is the living wage realistic? It’s important, I think, to realize that the living wage is meant as an indicator of the amount of income that is necessary to assure that a family can pay for the bare necessities of “living”. Keeping that in mine, it might be realistic. But, one of the key things I don’t see in the expenses categories is a line for any sort of debt servicing. Which means they’re assuming that you’re renting a house or apartment, and that you don’t have any other debts. And we all know how realistic that assumption is. Or not. I think, for this to be truly realistic, it’s got to assume that the family will be dual-income. It’s also got to assume that at least one of the two adults will have some student loan debt. More likely, both. And it’s got to assume that there’s going to be some other debts that will need servicing. Then it might border on a true living wage. Otherwise, it’s just another way of saying poverty line.

Go and give the calculator a spin. How close to the number are you? Are you so far from it that it’s scoff worthy? Or is it time for you to find a way to increase your income too? Do you think that the living wage is realistic?