Guest Post on Get Rich Slowly

I’m sure many of you read Get Rich Slowly anyway, but in case you don’t, I’ve got a guest post there today about target date funds.

Are 401(k)s a Bad Idea?

A reader named Trent pointed me to a story that 60 Minutes did last week, Retirement Dreams Disappear With 401(k)s.  It’s not their best work, and I’m not one who thinks much of their best work.

Helpfully, the CBS website gives a near transcript of it, so I can easily quote the way over-the-top copy read by the reporter, Steve Kroft.

It was a gray, chilly morning in midtown Manhattan and a line of unemployed, mostly white-collar workers, stretched for blocks around the Radisson Hotel. More than 1,000 middle managers, stockbrokers, consultants, secretaries and receptionists had come hoping to find a job.

It was called a career fair, but there was no merriment – only a whiff of desperation.

Many of the people at the career fair have been out of work for months and burned through their liquid assets; their future, even bleaker than the present.

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Odds and Ends

A few things too small for posts of their own have been cluttering up my (virtual) desk.

CreditMattersBlog today has a post on a column a few weeks ago in the Wall Street Journal by our friend Brett Arends on using your credit cards to raise money for an emergency fund.  It’s a stupid as it sounds.  The column, I mean, not the blog post.  I have a rule not to pick on the same guy twice in a week, so I will keep from saying anything bad about Arends.  I’ll just give you a link to where somebody else does it.  (Note to any WSJ editors reading this: I would be happy to do Arends’ job for whatever you are paying him.)

CreditMattersBlog apparently noticed the Arends piece from a post by Liz Pullman Weston at MSN Money with the (for me) irresistible title “Why Suze Orman is Wrong – Again”.  In case you missed it, good ol’ Suze put out some advice on March 1 that caused quite a buzz.

I want you to only pay the minimum due on  your credit card balance and instead make it your top priority to build as much of an  emergency cash fund as you can.

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Ramsey’s Step 6: Pay Off the Mortgage

I’m not against paying off mortgages.  I’m not particularly in favor of it either, any more than I have a general opposition to, or support of, latex paint or front wheel drive.

Dave Ramsey is most certainly in favor of paying off your mortgage.  Granted, he does consider it a special category of debt, setting it aside to be dealt with in Step 6 rather than in Step 2 with the ordinary stuff. But it’s still debt, and Ramsey takes no prisoners in his fight against that evil scourge.

Arguing against this is a little difficult because there are certainly cases and situations where paying off a mortgage is indeed the best course of action, and it is hard not to fall into the trap of framing the discussion as always vs. never rather than always vs. sometimes.

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WSJ Pushes Financial Engineering for the Masses

Yesterday’s Wall Street Journal had a column by Brett Arends in which he wrote positively on a relatively esoteric strategy, namely investing in the S&P 500 index while writing (i.e. selling) call options on that index.  It’s just the sort of thing that, in a different time and place, big media journalists would condemn as the foolish scheme of too-clever-by-half financial engineers.

I never know how much or how little to explain about the mechanics of financial instruments, but since I generally advise folks to steer clear of options, I will assume that a relatively long explanation of what Arends is talking about is in order.  So excuse me if the next few paragraphs are painfully obvious for you.

A call option is an option to buy something at a specified price for a specified time in the future.  So you might have an option to buy a share of GM stock at $5 on June 30.  If on June 30 GM is trading above $5, then your option is “in the money” meaning that the ability to buy at that price is worth something.  (It’s worth the difference between the current price and $5.)  If it is trading for less than $5, then the option isn’t worth anything, since buying at $5 would be pointless.

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