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Bucks: Don’t Mistake Investing Folklore for Personalized Advice

Carl Richards

Carl Richards is a financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

Most of what we hear about investing isn’t right or wrong. It’s a matter of applying what we hear to our own situation.

When we make investment decisions, they should be tied to our goals. We get into big trouble when we either:

a) Fail to get clear about our goals

b) Invest based on someone else’s goals

I’ve written before about the first situation. But as my friend Tim Maurer says, personal finance is much more personal than it is finance. We need to take the time to be really clear about our goals.

The second situation is a more nuanced situation. It can happen subtly, because a lot of what we hear and do when it comes to investing is basically based on folklore. We end up doing things because other people are doing them, and it leads to big problems.

Here are a few examples:

You hear that Harvard’s endowment is buying dairy farms in New Zealand.
You hear your wealthy uncle talking about how important it is to own municipal bonds. He has to be really smart because he’s so wealthy, right? And what he’s saying sounds so sophisticated that you think there has to be something there.
You hear the cool kids who just got hired out of Stanford’s M.B.A. program talking about investing 100 percent of their 401(k) in stocks. (They must be smart too. They went to Stanford!)

In all three examples, you might be tempted to change your investments based on something you’ve heard from someone else. But while dairy farms, municipal bonds and stocks might be good investments, you aren’t just looking for good investments. You’re looking for good investments that will help you reach your goals.

Your goals are not Harvard’s. Harvard’s goal is based on a different time frame, to build an endowment that will be around forever. You, however, many have goals to meet in 10, 20 or 30 years.

And your goals are not your wealthy uncle’s goals. He’s probably interested in buying municipal bonds because of his ridiculously high tax bracket and the tax-free status of the bonds.

Finally, your goals are probably different from the goals of people who just finished business school. Clearly, these young hotshots feel like they can afford to be extremely aggressive when setting up their retirement portfolios. Most of us are in a different situation.

Your goals are just that: Yours.

It’s not that Harvard, your uncle and the business school graduates are wrong and you’re right. The point is that when it comes to investing your money, the only goals that matter are yours.

Article source: http://bucks.blogs.nytimes.com/2012/12/24/dont-mistake-investing-folklore-for-personalized-advice/?partner=rss&emc=rss

Economix: Have German Wages Really Risen?

Matthias Rumpf of the Organization for Economic Cooperation and Development wrote me the following response to my column on the Germany economy:

I really liked your piece. It gives a very nice comparison on the two countries. However, for someone who followed the German debate over the past years from a “domestic” perspective I found it surprising that you made a point on the higher wage increases in Germany.

For most observers in Germany, wage moderation that took place over the past 10 years (and which was endorsed by the trade unions) was one of the key factors behind the increase in competitiveness and the higher growth rates you are seeing now.

That’s a very good point. For space reasons, I did not delineate between two different time periods in the column, and it’s worth doing so here.

From roughly 1985 to 1995, German workers enjoyed considerably larger real hourly wage increases than American workers. From 1995 through the present, wages in the two countries have grown at a similar pace – growing initially and then slowing down, to a pace more recently not much faster than inflation. (These trends are visible in the second chart in a recent blog post.)

Why did German wages grow faster in the first period? Some statistical quirks involving the reunification of the country played a role. But inequality also played an important role. In the United States, much of the benefit of economic growth went to a small slice of the population at the top of the income distribution. In Germany, the gains were more broadly shared.

And do the similar wage gains in the second period mean that workers in both countries have done equally well? No, German workers have still done better, because German job growth has been stronger.

So the typical worker who remained employed in Germany from the mid-1990s through today has received a pay increase comparable to that of the typical worker who has remained employed in the United States. But the odds of an American worker’s being unemployed have risen substantially over the last 15 years. The odds of a German worker’s being unemployed have fallen.

Bottom line: In Germany, the wage moderation of the last decade that Mr. Rumpf mentions has helped increase overall employment. In the United States, there has been no such silver lining. Wage growth for most workers and employment growth have both been muted.

Article source: http://feeds.nytimes.com/click.phdo?i=95e483ab02153af60d2cb801b7c2b9dc

Bucks: Don’t Mistake Investing Folklore for Personalized Advice

Economix: Have German Wages Really Risen?

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