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September 30, 2012


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It is crazy how much common sense seems to have changed over the years. Sometimes when I watch It's a Wonderful Life at Christmas I wonder if it would have been easier to live back then even though we wouldn't have all of the technology. Things seem like they were much simpler back then and people seemed to have more common sense.

Back when "it's a wonderful life" was not simpler. Even though they did not have credit cards,mortgage vehicles like they have now and they did not have the multiple lines of credit for college and cars like they do now, they had other things just a corrupt.

They had margin accounts for brokerage accounts that people did not understand and people lost alot of money in the stock market crash over leveraging and the run on the banks left alot of depositers with nothing.

My dads parents just about enough money saved in the bank to buy a farm just before there was a run on the banks and they lost it all. There was no FDIC to insure there deposit.Just like in a wonderful life.

The Great Depression brought back common sense because people had to live on nothing. My dad and his brother went out in the woods to pick wild berrys, asperagus, lettuce and anything else they could find. That was dinner for the family of 5. They would go along the train tracks picking up coal that fell off the train and that is how they heated there house.

They also knew they needed an education so they either were drafted or enlisted in the army and navy. After the war they took there GI bill and got a college education. No college loans. They worked the summer at paid internships. None of these unpaid ones. They worked hard.

This Great Recession ( the modern day depression) will bring back some common sense but there are too many safety nets and loop holes that people will take to shed responsibility.

We will not learn ALL the lessons of common sense like the Great Depression generation learned becasue we have too many safety nets in place.

We have FDR to thank a lot for such things as FDIC insurance (1933), Social Security (1935) and Aid to Dependent Children (forerunner of Welfare) in 1935. You're quite right FDR didn't bring us out of the recession, it took WWII to do that.

My wife and I have taken several courses on American History and learned that The G.I. Bill was one of the most successful programs of all time. There were also GI loans that had very low interest rates.

The veterans of WWII truly were "The Greatest Generation" as described in Tom Brokaw's book. Their children (the Baby Boomers) will do fine because they will inherit their parent's assets, but the generation after them are going to have their work cut out to obtain a really good retirement.

Heck, the current state of affairs leads me to believe that "common sense" should probably be renamed! As a veteran myself, I can vouch for the fact that the GI Bill is a huge help... it is the insurance that I will be able to get through my education and training, which might otherwise not have been possible.

Those who are financially literate to some degree often believe that their knowledge is just "common sense". On the other hand, those who are financially illiterate often display unwarranted confidence in their financial decisions. It's a pretty good example of the Dunning-Krueger effect.

If you're reading this blog, you're probably a bit more educated on finances than most. Please resist the urge to dismiss others as simply lacking in "common sense" when they are confused (often without even realizing it) on topics such as saving and investing for retirement or college. It may not be rocket science, but it's not easy, either.

"The skills needed to produce logically sound arguments, for instance, are the same skills that are necessary to recognize when a logically sound argument has been made. Thus, if people lack the skills to produce correct answers, they are also cursed with an inability to know when their answers, or anyone else's, are right or wrong. They cannot recognize their responses as mistaken, or other people's responses as superior to their own."

The whole reason I began to write about my personal finance journey and give tips based on experience is because of this exact thing. I was looking for something to blog about and my wife would say personal finance. When I would tell her that I am just using common sense she would reply that it isn't common what I am doing. Looking back I know she was right but it just felt to easy for me. Then again it was easier to make all the mistakes I did.

It's possible to perform incredibly complicated and difficult analyses on behaviors that obey the laws of physics, especially when the behaviors being studied are linear. However it gets a lot more complicated when the behavior you are analyzing is nonlinear. Fortunately in my field which was structural analysis all of the things a structural analyst usually analyzes (bridges, buildings, rocket motors, aeroplanes, machines etc.) operate in the linear range. Nonlinear behavior only happens when the expected loads on a structure are exceeded resulting in permanent deformation when the load is removed. With linear behavior, when the load is removed the structure returns to its original shape.

As for analyzing the behavior of the stockmarket which obeys no known laws of any kind it is totally impossible to predict what the stockmarket will do, tomorrow, next week, next month or next year. The only thing that you can do that makes any sense at all is to follow observable trends and then hope that the current uptrend lasts for quite a while after you have made your purchase. There's an old market saying that says, "The Trend is your Friend", and that is what I have used successfully ever since I retired in 1992. I buy mutual funds that are in a nice low volatility uptrend and hold them as long as I am making money. When the trend changes I switch into something else. The reason for using low volatility funds is that the trends change much more slowly so that you have more time to decide what you want to do. Even then only about 3 trades out of 4 will be winners but in a good market the winners will produce large gains and the losers only small losses. In a Bear market I sit on the side lines in income funds and am very content to make small gains whilst the novice investor is taking significant losses.

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