It would never occur to me to give out some bits of advice if somebody else hadn’t first suggested an unwise alternative. Some things seem just so obvious and uncontroversial that writing them up would be pointless. Then I read something that reminds me this is the personal finance world I am talking about.
Case in point is rolling your old 401k over into an IRA when you leave your job. According to the Wall Street Journal’s Smart Money, this is not the no-brainer I foolishly assumed. It is a conundrum. Who knew?
In case you are not up to speed on the deal with 401ks once you stop working where the 401k lives, you basically have four choices. You can cash out the money in the form of a distribution, on which you will pay income taxes and, assuming you are under 59 1/2, an additional 10% penalty. That’s probably not a good idea unless you seriously needed the cash. (For example if you just lost your job.)
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Yesterday’s New York Times had an article about the simmering controversy over target funds headlined Target-Date Mutual Funds May Miss Their Mark. (Get it? It’s a pun.)
Target date funds have been around for a long time. They are a sub-species of asset allocation funds, mutual funds that, in effect, own other mutual funds in order to create a diversified one-stop-shop for the investor either too busy or too intimidated to pick his own. I’m not a big fan. I think you can do better making your own asset allocations, but that has little to do with the current round of hand wringing in Washington.
To understand what has caused the present consternation, you have to go back a few years.
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Part of the deal when you participate in a carnival is that you link to it from your blog. My weekly Carnival of Personal Finance links have been getting less perfunctory lately, to the point where I thought I would try making a proper post of it. It’s an excuse to discuss a lot of personal finance advice from several blogs at once, which certainly fits into the theme of BMA. So here goes.
The carnival is hosted by Suburban Dollar this week with a delightfully kooky theme, the beyond vintage video game Mike Tyson’s Punch Out.
One of four editors picks this week was Happy Rock’s post 16 Year Old Skips The Last Two Years Of High School To Play Proffesional Baseball. The gist of the post is that this is a bad thing. It is about Bryce Harper, a 16 year-old from Nevada recently featured on the cover of Sports Illustrated, who dubbed him the "Chosen One". He plans to skip out on 11th and 12th grades in order to enter next year’s baseball draft. This is a maneuver that will probably net him a sum in the high seven figures.
How could this possibly be a bad idea? I know guys who would pay in the high seven figures to play professional baseball. And some of them would pay extra if they could’ve avoided the second half of high school. Granted, Bryce’s education will suffer. He might, for example, not learn how to spell "professional" or the difference between "to" and "too" or (gulp) "beat" and "beet".
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Last week the New York Times ran an installment of its Wealth Matters column entitled How Do I Know You’re Not Bernie Madoff? Literally, it’s an easy question to answer. (Because I’m not in prison.) But figuratively it’s an
important question for which everybody with money to invest should have an answer.
The column starts out with a brief interview with a private wealth manager with the impossibly appropriate name of Tony Guernsey. (A posh off-shore banking center?) And there’s a picture of the fellow. He looks exactly as Ralph Lauren would have him look: tortoise shell glasses, chalk stripe suit, and chin thoughtfully rested in right hand. In the foreground there is (I swear I’m not making this up) a small red flag.
Tony Guernsey has been in the wealth management business for four decades. But clients have started asking him a question that at first caught him off guard: How do I know I own what you tell me I own?
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Most people, including experts and even sometimes this blogger, use what I call the Black Box Theory of Stock Market Returns. It isn’t really much of a theory. The idea is that the internal workings of the stock market are basically mysterious and unknowable by mortals. The best you can do is to observe what has happened historically to people who have put money into the box 
and average their results.
So we find that the S&P 500 return has averaged X% over some number of decades and we conclude that over the long run that is what we will get from the stock market. You may not get X% in any given year, but you should expect to get that as an average over a long period, because that was the average over a long period in the past.
This is not an entirely unscientific approach. It is objective and makes appropriate use of data. But on reflection it should be pretty clear that it is not all that scientific either. It lacks any sort of explanation of how or why the market returned X%. Maybe there was something that was driving the market up in the past that will not apply in the future. It’s possible.
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Investing, Media | Frank Curmudgeon | 
June 29, 2009 9:30 am | 
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