As would be expected from any serious economic downturn, Americans’ emotional reaction to the Great Recession is mostly a predictable collection of negative feelings: sorrow, fear, despair, regret, and so on. But there is another emotion in the mix that took me a little while to understand. It is anger. To be more specific, it is anger about losses in stocks and other financial assets.
It took a while for me to pick up on this partially because it is so alien to the
way I think about my investments. Not to go too far into unpleasant details, but I have lost a lot of money in the stock market in the past year. Really a lot. I am sad about this. I am regretful that I didn’t bail out when I could have. I even feel foolish about a few particular investments I chose. But I am not angry at anybody about it. Why would I be?
I knew what I was getting myself into. As readers of this blog know, my attitude to the stock market can be characterized as long term optimism tempered with a healthy dose of life-isn’t-always-fair. I knew that the market going down by half was not likely, but always a possibility. It had happened before. And I knew that although being a long-term investor increased my chances of a happy ending, nothing guaranteed one.
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In the past week two popular personal finance blogs have posted remarkably convoluted pieces on the relatively simple concept of mortgage interest.
Last Friday Free Money Finance posted an excerpt from The Sound Mind Investing Handbook – A Step-By-Step Guide To Managing Your Money From A Biblical Perspective 5th Ed
. (You know it’s gotta be good, it’s in its 5th edition.) The entire post could have been replaced by the following sentence:
If you have the choice between investing with a guaranteed 8% return and paying down your 6% mortgage, choose the investment because it will make you richer.
If you are thinking that my sentence is lacking because it doesn’t explain why you are richer and assumes an unlikely risk-free return, I am not unsympathetic. But my goal was only to replace the FMF post, and that post has both those flaws as well. And a few more.
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Not long after you convince yourself that buy-and-hold is the best way to invest in the stock market, you start to get doubts. Sure, owning a well diversified portfolio of stocks through thick and thin is the best way to capture the high long-term average returns that you expect, but couldn’t you do a little better? Couldn’t you sell your stocks when the market is particularly high and maybe double down when it is particularly cheap? How hard could that be?
Pretty darn hard, it turns out. Only in the clarity of hindsight are those market peaks and bottoms obvious. The towering heights that the market reached in the spring of 2000 and fall of 2007 now look like great places to exit only because we know what happened next. Yes, stocks in 2000 were by many measures more expensive than they had ever been in the past, but saying that everybody should have therefore known to sell is unfair, because stocks had been unprecedentedly expensive in each of the four or five years prior to 2000 as well.
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Bad Money Advice’s post on inflation is in this week’s Carnival of Finance hosted at ABCs of Investing.
There’s lots of good stuff to read there, but one post I wished I had written first was from The Dough Roller on a true snake oil salesman.
Click and enjoy!
Of Dave Ramsey’s Baby Steps, the one most widely discussed in the blogosphere and elsewhere is #2, The Debt Snowball. This is the step in the program where the participant pays off his non-mortgage debt. Even I can’t find a reason to say this is a bad idea, at least not in principle. If you want to improve your net worth, and you owe lots of money, then paying those debts down is almost certainly the place to start.
It is the way that Ramsey advises that you pay your debts down that is controversial. He instructs that you sort your debts and pay them down in order 
of size, smallest to largest. To his great credit, he concedes that this does not exactly make sense. It is, according to Ramsey, “more concerned with modifying behavior than correct mathematics.” (Total Money Makeover, p.111.)
Many money gurus give advice that makes sense (if it makes sense at all) only in the context of psychology, but few actually admit it. So Ramsey gets points there. But saying the math doesn’t quite work is a euphemism. This isn’t math, it’s money. If you want to pay off your debt as quickly as possible, or if you want to maximize your net worth, which amounts to the same thing, you should pay off the debts with the highest interest rates first. Period.
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way I think about my investments. Not to go too far into unpleasant details, but I have lost a lot of money in the stock market in the past year. Really a lot. I am sad about this. I am regretful that I didn’t bail out when I could have. I even feel foolish about a few particular investments I chose. But I am not angry at anybody about it. Why would I be?
Government, Investing, The Big Picture | Frank Curmudgeon | 
April 10, 2009 11:23 am | 
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