10 Dumb Things Adults Do With Their Money

Mary Hunt lists 10 dumb things adults do with their money as follows:

1. They love to buy high and sell low.

2. They play important games without understanding the rules.

3. They believe anything they want to believe.

4. They pass over the low-hanging fruit in favor of the fruit that is way out of reach, if it is reachable at all.

5. They think strangers want to help them.

6. They constantly complain about taxes, but pay more than they need to.

7. They lend money to people who they know can't pay it back.

8. They follow the herd.

9. They watch too much financial TV.

10. They spend their investing lives in a futile attempt to disprove second-grade arithmetic.

Ha! I thought this list was very funny -- and made funnier because it's so true!!!

A few comments from me:

• I used to do many of these (basically all of them except 5, 7, and 10), but (thankfully) got wiser fairly quickly and avoided most of these for much of my life.


• Mary's piece reminded me of my own list of the ten worst money mistakes anyone can make.


• In her post she notes how second graders know to avoid the items above (for instance, they are told to deal cautiously with strangers) and wonders why adults don't follow suit. Obviously we all become "smarter" somewhere in the process of growing up. :)

So, here's the question for today: do you commit any of these mistakes? If not, I'm sure you have "a friend" who does, right? :)

Comments

[Matt]

Yes I have done some of these but wised up. It is the ones who don't learn that it troubling.

I have watched some of the TV dolts until they give bad advise.I think it was Suzy Orman who was talking about good debt bad debt. NO Debt is Debt. Click. Changed the channel.

[Luis]

Yes, I know someone like this except they do not watch too much financial tv. Many people are like this and I struggle with them as individuals and collectivelywithin our society. It's more frustrating than it is funny.

[Old Limey]

On number #1, believe it or not, I like to buy High, but to sell Higher.

The trouble with buying low is that unless the investment has formed a really good bottom over a reasonable period of time then there's a good chance it will go lower after you have bought it.

If you buy an investment that is in a good low volatility uptrend then there's an excellent chance that it will continue in that uptrend for quite a bit longer.

Here's an example of the only fund I own fund, compared with the S&P500 for the YTD period.

.............. Volatility ---- ANN% ---- Max %Drawdown
My fund .... 0.19 ----- 19.88% ------ -0.89%
S&P500 ... 3.78 ----- 19.23% ------ -9.94%

Notice that the S&P500 has twenty times the volatility and 11 times the maximum drawdown of the only fund that I own, which is Pimco's Institutional Income fund, PIMIX.

Owning funds that are in nice low volatility uptrends makes for a happy and contented investor that sleeps well at night.

Owning funds that are very volatile makes for a very nervous and worried investor.

[Apex]

@OldLimey

How would you compare PIMIX or (PONDX for those without 100K) with PTTDX.

What would be the reasons to choose one over the other in your opinion?

What does PIMIX invest in for an income fund that allows it those kinds of returns?

Which one faces greater risks from future interest rate increases?

[Stock Elf]

So true - all of them.

Missing from the list is: Adults thoroughly enjoy giving their money to Ponzi schemers in hopes of astronomical unrealistic returns. These are the same adults that are constantly asking about the latest and greatest IPO they heard about on the news.

[Old Limey]

@Apex
.............. Volatility ---- ANN% ---- Max %Drawdown -- For YTD
PIMIX ........ 0.19 ----- 19.88% ------ -0.89%
PTTDX ...... 0.37 ----- 11.08% ------ -1.35%
S&P500 .... 3.78 ----- 19.23% ------ -9.94%

--------------- Average Annual Total Return
Return ....... 1yr ............ 3yr ............. 5yr
PIMIX ........ 9.5% ....... 16.5% ....... 10.60%
PTTDX ..... 7.15% ....... 8.19% ....... 9.01%
S&P500 .. 19.75% ..... 11.19% ..... -0.94%

PTTDX owns 62% domestic and 38% foreign bonds, avg. duration 5.37yrs.
PIMIX owns 80% domestic and 20% foreign bonds, avg duration 4.58 yrs.

The Fed has already said that interest rates will stay at current levels until the end of 2014.
I have my son's 401K in PTTDX because that's all he has available.
I prefer PIMIX because of its better performance. The returns don't just come from interest payments, quite a bit is the result of capital gains realized by PIMCO and also the effect of supply and demand in the marketplace.

I have never, ever considered any mutual fund to be a long term investment, I only hold them as long as they are in an uptrend. Individual bonds and CDs are entirely different, I hold those until maturity when I know I will get my money back. One of my Golden Rules on any investment is "Don't Lose Money" and since retiring in 1992 I haven't ever had a losing year.

[Apex]

@OldLimey,

So do you use a formula you have referenced here before such as crossing the 50 exponential moving average to move out of a fund such as PIMIX and to move back in? If so do you look for other funds in an uptrend at the time or hold in cash? If bonds turn it is likely once they cross the line most will also be in a downtrend. I am just curious what your strategy will be in that kind of an environment.

[Old Limey]

@Apex
Prior to 2008 when I was more adventurous I used one of the 80+ modules in my own software to backtest a fund to determine the best value of a filtered exponential moving average that produced the best return while, at the same time, keeping the number of trades/year down to 3 or 4 at the most. The filter was chosen to minimize whiplash trades. This method worked very well for trading high yield bond funds because they are far less volatile than stock funds. For stock funds you need uptrending market periods and most non-retired investors don't have the analytical tools, the comprehensive database updated daily, the time, or the knowledge to know when to be in stocks and when to be in income investments, and also aren't frequent traders.

These days if I decided that a fund like PIMIX isn't giving me what I am looking for with the sixteen percent of our IRAs that it represents I would look for tier 1 corporate bonds with coupons as high as possible. Eighty four percent of our IRAs are still in high yielding CDs and tier 1 corporate bonds such as G.E. capital yielding 5.1% and CDs such as Goldman Sachs yielding 5.15% that I bought in 2008 and that are laddered out as far as 2032.

I don't think I will have any problem maintaining our current return of 4.995% (tax deferred and tax exempt combined) that accounts for 80% of our income even if interest rates move up in 2015. A few bonds may get redeemed along the way but they are easily replaced. The other 20% of our income comes from our SS and pensions.

For us this trouble free approach is great. We have friends, a couple in their eighties, one with major back problems, that own a really nice fourplex to generate income. They also have considerable debt on it and are finding its management to be more than they can handle at times. One major water leak put two of the units out of commission for a couple of months.

[Luis]

@ Apex Why are you considering bonds? From everything I've read you write I have every bit of confidence in your talents. This I would pose as self controlled low volatility. If I were you I would not worry about diversification at all and instead put it all in real estate.

[Apex]

@Luis,

My accessible capital is mostly in real estate, but I have 401k and IRA money that has to go somewhere. I also enjoy picking the brain of people who have done things successfully to see what their strategies are. It does not mean I will necessarily attempt to do what they are, but it is still informative.

[Luis]

Yes very interesting strategy Old Limey has and very successful picks. On the future though I am still sticking with Vanguard total stock as I cannot fully accept Old Limey's take on a defunct stock market. Also with interest rate at its lowest, bonds have little left momentum before the tides change. Old Limey will get out in time but I'm afraid I wouldn't.

[Old Limey]

@Luis
Since I plan holding all of my tax deferred and tax exempt bonds and my CDs while earning an average of 4.995% interest until each one matures between now and 2040 it wouldn't make any sense to sell them as soon as interest rates start creeping up. I keep them on my books at their coupon value of $1,000 which is what they are worth when they mature. In actual fact because I bought them when interest rates were a lot higher they are paying far more interest than I could get in new issues today so my Fidelity account shows a market value on them totalling almost $0.5 million more than what I paid for them. As a bond or CD gets closer and closer to its maturity date its value will change until on the day that it matures its coupon value returns to $1,000.
I am only interested in avoiding losses, maximizing my interest and not looking at all for capital gains. I also prefer to buy bonds issued by California or by US protectorates since they are also free of state tax.

With stocks there is always a market whether you are a buyer or a seller and you know what price you will pay or receive. With bonds however it is very different, if you absolutely have to sell some bonds immediately you are going to get a very poor price, which is why I have never sold a bond and don't ever plan to.

Actually rising interest rates will benefit me in that any new issue bonds I buy to replace ones that are being redeemed will have higher coupon rates than bonds issued at today's rates. Actually for the bonds that I have had to replace in recent months I have bought replacements in the secondary market and have had no problem at all finding replacements with 5% coupons at prices between $1,002 and $1,006/bond.

[Old Limey]

@Luis
The database that I subscribe to has 24 years of data.

Vanguard's S&P 500 fund includes all dividends.
For the first 12 years from 9/01/1988 to 8/24/2000 its Annual %Return was 18.62%.
For the last 12 years from 8/24/2000 to 8/27/2012 its Annual %Return was 1.25%.

Considering the current state of the world economy, and the US government's financial picture, if I needed a good investment return between now and when I retire I would feel most uncomfortable betting on the stock market to give it to me - just my opinion!