Sunday, August 09, 2009

Being Thoughtful About Money

Let's just admit it up front: once a society goes beyond the barter system, "finances" are all smoke and mirrors. If I have a couple of chickens, you have a goat and we trade, you'll get some eggs and I'll get some milk. If I bake loaves of tasty bread, you weave a beautiful blanket and we trade, there’s no mystery about the exchange or value of goods.

Start using money and everybody's operating on faith. Even before we abandoned the gold standard, everyone had to accept that gold was special and worth some amount we all could agree on -- a fairly arbitrary assessment when you think about it. And now there are plenty of bizarre, almost totally inexplicable financial instruments that have brought down the entire world economy. This is progress?

Obviously, in a complex society the barter system won't work, therefore money is necessary and useful. Maybe it's the abstractness of the concept of money that gets so many people into trouble.

Clearly our perception of money and credit and what has value has been tossed on its head in the last couple of years. This is not a bad thing in the eyes of someone like me who came of age in the sixties, but it's certainly a bad thing for anyone who was caught unprepared for the current recession.

So, armed with only a very fine liberal arts education and far less money than Donald Trump, I'd like to offer a few thoughts about financial planning from a thoughtful consumer's point of view. Investing presumes that you are fortunate enough not to be living paycheck to paycheck and that you are fortunate enough to have a paycheck at all. Even if that's not the case, take heart. You can still use this information to help plan your future.

First, the stock market: it's not for everyone, especially if you buy individual stocks. If you have a pension plan of any kind at all, you're already in the stock market. It's okay if you choose to invest your own money elsewhere, no matter what the investing gurus insist. It's your money.

What set me off about stock market investing was yet another article reporting about yet another company that had missed analysts' profit predictions; in this case, the company had "only" made 26 cents instead of 31 cents per share. This caused the stock price to drop 7 percent.

If you were an investor in that company, you would not have this information quickly enough to act on it to avoid losing at least some of your investment. If you were a long-term investor, you might shrug it off and feel confident that you'd recoup your money in time. But how would you know this? Either by relying on your broker (an honest one, I hope, who charges less than the usually high standard fees), or by having the ability on your own to investigate the company in detail and make appropriate decisions based on your knowledge of the company itself, the entire industry and reasonable predictions of future trends. How many of us can do that? Not many.

If you bet on the stock market by responding to supposedly hot tips, you're gambling, not investing. If you still have "disposable income" in this recession and choose to gamble, again, it's your money so it's your choice. Just don't delude yourself into thinking that a hot tip is better than a Lotto ticket when it comes to retirement planning.

But if you're convinced that the market is the place for you to be, I'd like to suggest the following books (total disclosure: they are not infallible, nor do I personally endorse or follow all of the recommendations, but, like I said, I studied liberal arts).

If you know something about the stock market, or thought you did until lately, try these:

A Random Walk Down Wall Street by Burton Malkiel. This book presents a strong case for index fund investing and explains why it can be very expensive to try to beat the market.

Mr. Market Miscalculates: The Bubble Years and Beyond by James Grant of "Grant's Interest Rate Observer," also the author of the original Minding Mr. Market. Grant suggested that "Mr. Market" behaves in a manic-depressive way (bi-polar would be the updated term for today), so it should be no surprise that the opinions of someone who is so afflicted might not be terribly reliable.

If you haven't got a clue about investing or if you know just enough to be dangerous, try this:
The Only Investment Guide You'll Ever Need by Andrew Tobias, is an engaging, informative book that novice investors can get through without feeling overwhelmed. He offers information on many types of investments and uses his personal experiences as examples.

If you want to learn how reasonable people can be led into ridiculous investing schemes, I'd suggest:
Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay. You might not think that a book published in 1841 could be relevant today, but that's not the case. There's a priceless chapter about the Dutch tulip mania in the 1600s during which the value of tulip bulbs was greater than the value of gold (so much for the gold standard). Although the precise accuracy of MacKay's account has been questioned (what isn't?), the story will convince you that bubbles are nothing new.

However, if you want to consider an alternative investing plan, I'd suggest:
Your Money or Your Life by Vicki Robin, Joe Dominguez and, for the updated edition, Monique Tilford. I'm about to start reading the new version of the book, so my recommendation is based on having greatly appreciated the original which was written back in 1993. In fact, this title and Sugar Blues are the only books that I've purchased multiple times for myself but ended up giving away to friends. The authors ask you to think in terms of "life energy," i.e., calculate how much life energy you're required expend in order to earn a dollar. You'll find out that your hourly wage is less than you believe. You'll also find out a lot about how you relate to money.

If you want to rethink your relationship to money even further and you nurture "back to the land" fantasies as I do (and, in my case, they will remain fantasies, which is all for the best), consider this fine book:

The Good Life by Helen and Scott Nearing. I read this long ago, but one concept in particular will remain forever in my mind as an example of how to structure a thoughtful life: the Nearings advocated spending four hours a day earning a living, four hours serving the community, and four hours pursuing one's personal interests.

Further total disclosure: I don't follow all of the advice in the alternative books either, but much of it has been extremely valuable to me. Also, I haven't always made the best decisions, but, thanks in part to all of the authors mentioned, I've made some good ones.

The important point to remember is that if we're going to be thoughtful consumers, we need to understand the process we use to consume, then figure out a way to shape our lives financially so that we can find a greater meaning than what is provided by acquiring more and more stuff. This also requires asking ourselves:
What good is buying things that are supposed to be better for the planet if we really can't afford to buy anything at all? How can we be socially conscious if we're working two jobs and haven't an ounce of energy to devote to anything beyond our survival? What can we do to take control of our finances, as much as we possibly can, so that we can move on and live worthwhile and satisfying lives?

And that's my two cents. (Oh, come on. You knew it was coming.)


© 2009 Cynthia Friedlob

Photo credit: pxl666
StockVault.net

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