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February 13, 2009


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Great post.
The three actions in step one are words I'll live by.

Thanks for the insight. These are crazy times.
Its good to get well thought out advice from someone who's not trying to sell you something.

Good post Neal. It makes sense to track our spending instead of just living month to month. I wish I would have done this years ago. Thanks for the info!

Neal, thanks so much for this. Isn't it amazing that most of the things we need to do to both protect and grow our financial security really are "common sense"? And yet we don't do them...or worse do the opposite!

Do you have any insights as to why that may be?

We need more commentary like this, Neal. Common sense advice that's based on actually trying to help people, instead of adding more to the fear that is all around.

Clear and insightful. I feel like I can really use this info. The discussion of time frames and investing is something I never really thought about. I just see those investment statements coming in and I turn to mush. I have a different least for now. Thanks.

How about this one: Don't invest all your money in one place!?!

Many articles recently about Madoff victims who invested their entire life savings with him. What were they thinking...???

Nice article.
I should try them whem i am retired...

Great comments. Thanks. Mark, to your question. I believe that we "misbehave" with money (even though we know better) for the same reason that alcoholics continue to drink - even though they know better too.

You could almost call it a spiritual malady. The same "tools" that have helped thousands and thousands of people stop drinking could be borrowed to help become more balanced with our financial behavior. The first step in recovery is to admit there is a problem. That's a difficult thing for us to do. We think if we just buy this book or listen to that tape, it'll all work out. It doesn't because the problem is our willingness to "fire" ourselves and become willing to really take direction. I believe that once we become willing to be honest about our own limitations, the possibilities exist to make real progress. I know it sounds contradictory but that is the basic concept that has helped countless individuals overcome challenges just as bad if not worse than financial imbalance.

Thanks Mark

Neal, great post as always! My only quibble (and it's minor) is your suggestion that by taking these steps "you can eliminate financial anxiety." Unless you have acquired enough wealth to become completely 100% financially secure you can never really eliminate financial anxiety. Even someone who is young, with a stable job, and has followed your 5 steps to the T will suffer some financial anxiety in a down market. It's not easy to see 20-40% of your net wealth go up in smoke no matter who you are and not feel anxious about it.

Good points to help with savings. Understanding your timeline is pretty critical as it will help drive and dictate your behavior.

Neal (great name by the way)

I agree with your point. You'd have to be on high doses of anti-depressants to go thru the current market without some anxiety. Its only human. Maybe I needed to add a 6th step which is remembering not to worry about things you can't control. I think that you can be concerned - even very concerned - and that is different from anxiety. Often, the anxiety takes over and has a life of its own. Concern is good....anxiety can freeze us out of taking the action we need to take.

Bottom line, you are right, we can't eliminate anxiety but I believe its a worthwhile and beneficial goal.

Thanks for your thoughtful comments...

"Forget about predicting the future."

What does this statement mean, exactly? Why is every financial adviser I read or hear on TV always telling me "forget about timing the market?"

Strange, because every time you invest your money, you also make an implicit assumption about the future. You think asset prices will rise -- duh! -- or else why invest?

What financial planners and anybody associated with the mutual fund industry, or real estate agents -- what they mean when they say "don't try to predict the future" is "don't reflect on the fact that every dollar you invest today and every other day in this nasty bear market will invariably lose you money."

I mean, who needs a CFA or and index fund manager when your retirement accounts are 100% cash or you're not levered on in the real estate market, save for an affordable mortgage?

Talk to me after another 25% down in the S&P, then I might consider moving a piece of my hard earned retirement cash back into the casino known as Wall Street.

(And the truth is, many people did see this financial train wreck coming. The information was out there, which is why I've been all cash in my retirement accounts since 2006, and I'm nobody special or particularly smart.)

Neal, (great name by the way!)

You are right. You'd have to be on high doses of anti-depressants lately not to be worried and anxious. Especially when it comes to the market.

I should have added a 6th step which is not to worry about things you can't control. I believe that anxiety freezes us from taking the action we need to take (like looking for a different job, cutting spending, getting a smaller home). Being concerned is important and appropriate. Anxiety is the enemy of action and it saps our energy.

But being human means we have anxiety. Thats why its important to have this discussion. Thanks for bringing it up. I appreciate the thoughtful comment.

Jim, I appreciate your candor. Congratulations on predicting this market - I wish I had met you 14 months ago.

Acutually, I'm an adviser who has been in cash 100% at times - and that has problems all its own. If you are able to time the market going forward and know when to get back in, I congratulate you again. In my career, I've made good calls and bad calls when I was trying to time the market. I found that on balance, the risks were greater in trying to do so. I do believe that it is important to be strategic with investments and not stay static but I don't know anyone who can consistently time the market and I don't think anyone can do so consistently. The costs of getting it wrong are great. In this case, you were fortunate.

Thanks for the response Neal.

Like I said, I'm not particularly smart, but I work hard at protecting my assets. I also work hard for my money, and I read sites like FMF to keep me focused on saving what I can, to provide my family a buffer against hardship. It pains me to no end to see so many people get hurt by this damn market, and by real estate. Personally, the prospect of little asset appreciation going forward is something that hurts us all.

That said, I think people need to wake up to the fact that the problems confronting the economy are unprecedented and the path that leads us beyond the malaise is not clearly defined.

What is the problem we face? Too much debt, way too much. At the personal, corporate, and state/federal level. And there is simply not enough income to cope with the debt. Banks are sitting on trillions of debt instruments worth much less that they claim, and a true accounting of these assets would force these banks -- the big, greedy ass money center banks -- to finally admit they are insolvent.

But insolvency, brought about by reckless lending, is being rewarded. Hundreds of billions flow into institutions that have wrecked our economy. The stupid are rewarded, and the prudent get nothing.

Enough of that rant. Bottom line, the deflating of this massive debt bubble has no historical precedent. These are uncharted waters. And I suspect much of what passes for conventional thinking as far as investing goes will be turned on its head when this is all over. And at the core of this thinking is the idea that retirement accounts with heavy equity exposure is like "money in the bank." It's not, and those expecting a return to the old highs on the S&P should take note of the Nikkei, which topped out at 39000 in 1989, and which is has been going lower ever since, to under 8000 today. Markets can go sideways to down for a long time, and I don't think people are at all prepared for this scenario.

Along those lines, I think an investment strategy that appropriates some measure of "timing" the market -- i.e., one that scales into markets on the downside when the fear is palpable, and one that scales out as the pollyannas pronounce the death of the bear after the next huge rally (and there will be massive rallies) -- will fare far better over the next decade than a strategy that simply buys and holds. That's my honest take and it's the way I'm playing it.

In my eyes, it's all about timing, and the time it will take to heal the excesses of the past.


I agree with you on many points. The reckless spending. The current "stimulus plan" which is no plan and no stimulus. The lack of responsibility on the personal, corporate and government level. Its frightening. I also agree that we are in deed in uncharted waters.

Its reasonable to assume that it could take a decade (or more) to get back on track. Nobody knows because, as you said, we are in uncharted waters.

My fear is that many investors will rely on their emotions to time the market and that would be probably worse than holding through it. Its a question of where you are today, where you want to be at a given point, and the map you plan on using to arrive at your destination.

I do think that timing can work for a given market situation but not in the very long term. In this particular case, you seemed to time it right and of course I wish you nothing but success in the future. It sounds like you are using a "map" based on observable fact rather than feelings. Well done.

Right now we're trying to decide whether we should scale down the asset mix of our current and future retirment fund purchases. Our goal has been to maintain a 60/40 stock/bond allocation. We lost 22% last year (not counting new purchases) and were at 51/49 on 12/31/08. We're still putting new money in at the same ratio and rate.

We're not yet ready to declare defeat and rebalance our entire portfolio to a much more conservative allocation, but we are strongly considering changing current purchases to all cash or something close to that. This is precisely because of what James is alluding to. Our non-retirement investments are mostly in cash and government bonds.

What's everyone else doing?

rwh, I have found that drastic changes in one's retirement portfolio can only lead to diminished returns over time. Neale Frankle is right to point out that when typical investors allow emotion to dictate their decisions, the end result is poor returns.

There is a reason the heard panics at the bottom or gets overly giddy at the top -- and I assure you, I'm not immune from panic or giddiness -- and it's called fear and greed.

That said, you are wrong if you think that rebalancing your portfolio is in any way an admission of defeat. You see what's unfolding around you and you want to take action. That is a rational response to the sea of uncertainty confronting us.

Along the lines of avoiding anything too drastic, may I suggest that you follow through with your idea to direct current contributions to cash. At worst you miss a little upside. At best you have the funds available to deploy should the markets continue to falter.

And a thing about government bonds: the recent panic pushed up government paper to historical new highs because money sought the safest place to hide. It is a given that government bonds will be hard pressed to maintain these given levels, let alone move higher, over the long term.

Why? Because our government is on a spending binge. The stimulus bill is large and probably not the best use of taxpayer funds, but that will pale in comparison to the TRILLIONS we will hand over to worthless institutions like Bank of America or AIG or Fannie Mae. Forget the trillion and change for Iraq and Afghanistan, which is another huge waste of scarce taxpayer dollars. At a certain point, people will start to wonder if our government can pay back its own debt, and the prices of government bonds will come tumbling down.

I'm reluctant to use the word "bubble" when talking about government paper -- i.e., long bonds, short term treasuries -- but they are by, any historical criterion, very, very expensive. Can the price continue to go up when trillions more will be sold over the next 24 months?

Therefore, I think trimming a little of the government paper (20%?) makes some sense. Here again, keep that money in cash.

But by all means, look to build up your cash levels. You can never have too much when deflation is running rampant.

And remember, in a deflationary world, your dollars might not make any interest, but they hold their value while things you buy with cash -- stocks, corporate bonds, real estate, and commodities -- continue to go down in value.

Good luck!

Thanks for your comments Neal. Actually, my name is Dave, not Neal. Must have been a typo or something in the Name field.

Sometimes these articles let me down, because they seem to always assume you have money to invest somewhere, or even credit cards, the working class, working to pay the bills, and it is difficult to save because there will always be something you need . In my case, there are ways that have been broken, and I know this is where Im going to get some extra money, except perhaps to invest .

There are often significant tax considerations that ORC is not very good. Finally, it is important to note that the development of any of these questions are not just a numbers game: a diversification of assets and even real money, the search for alternatives to the goals and objectives are matters of life crucial ... and it can be done well by open communication and patient. Financial planners may or may not be the desire to participate actively in the process of communication, but it is their professional responsibility, I believe that at least offer its customers, and to emphasize the importance of that This, if done with or without them.

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