{paraphrasing} Americans aren't exactly the sharpest when it comes to financial basics (liquid cash, invest)
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As humans we can be so fearful of losing money we shoot ourselves in the foot all the time.
As larry swedroe pointed out we cant even see our hand in front of our face sometimes.
How many had a choice at one time or another to chose between a 1 year or a 2 year cd?
We would say to ourselves ,i think rates are going to go up so lets do the 1 year.
So we pick a one year cd at 1% instead of a 2 year at 2%.
Well next year we are thrilled as rates jumped to 2.50% on the one year and we get to take advantage now.
Only one problem. We got 1% the first year and 2.5% the 2nd year for a total of 3.50%.
Had we taken the 2% two year right from the get go we would have had 4%.
The reason so many got stung by low rates in cd's and money markets playing it safe is they didnt understand basics.
They should have gone into longer term bonds but they feared rates would rise and they would both lose money if they sold or wouldnt get the higher rate if they didnt.
They failed to realize the spread between short term rates and longer term rates is big. They could have collected 2-3% instead of 0 to 1% for a few years.
Then if rates rose the short term rates would have gone up very slightly while the slight loss on the longer term if you now wanted to sell would have still left you with far more interest..
Thats an important concept to understand. If you are confused ill be glad to take another stab at explaining it.
I understand what you mean. I was very fortunate and invested long term in two CD's that the interest rate was 5 percent. The investment manager at bank was trying to talk me out of it at the time, but I stood my ground. I am sure glad I did. I know the interest rates on CD's won't be that high when they come due.
I'll bet you that if they taught a basic consumer ed/ finance course to kids with real money the kids would eat it up.
I mean just a pot of $200, and then some kids are the bank, some are corporations, some consumers --- like Monopoly with real money. At the end everyone keeps the real money that they have managed to acquire.
I'll bet you that if they taught a basic consumer ed/ finance course to kids with real money the kids would eat it up.
I mean just a pot of $200, and then some kids are the bank, some are corporations, some consumers --- like Monopoly with real money. At the end everyone keeps the real money that they have managed to acquire.
the legal advisors of the school boards would stifle any idea in that vein. or, lawyers would exploit the fledgling idea before it grew wings ---with good old fashioned "billable hours". however what I would suggest is the kids conduct the experiment with funny money. the ones who succeed with ROI or whatever can then write a report on what they did right and what their classmates probably did wrong (or did, in fact, do wrong). this report can be submitted with college applications if the kid is inclined to formally study finance at the college level.
has anyone ever altered their plan, strategy or any event in their life based not on the business cycle but on which political party was in office.
i can tell you never ever have i altered a thing in my life based on the party in office.
"not I" said the fly.... for some odd cosmic reason, i do remember a guest on CNBC making a suggestion (right before George W Bush began his first term) to invest in aerospace and defense because IIRC he claimed that sector tends to fare well with a Republican president. whether or not anyone took his advice is unknown. let's also remember CNBC has more guests per year than Leno & Letterman & the White House's holiday gala guest lists combined, so, ya know, grains of salt and all that jazz. i dont remember the person very well because I wasn't really paying attention but he wasn't an esteemed "guru"-level guest, just a non-guru from somewhere forgettable.
Last edited by grimace8; 09-30-2012 at 02:00 AM..
Reason: apostrophe
larry swedroe wrote an article that highlites how little folks understand what goes on in financial matters and how it hurts them
most folks have no clue at all how interest rates work or the bond markets.
they just believe their own bull-sh%t.
they sit with their money parked in banks and money markets because they are afraid to do anything with the money and get near zero and complain because they hear other ill informed people say stay short as interest rates have no where to go but up.
what these folks dont realize is that there is a split between the short term rates the fed controls and the longer term rates investors control and more ofton then not they dont move together in the same direction.
the fed raising rates in the short term can be better for longer term bonds because of reeling in inflation.
that means the fed can raise rates and bonds can still go up.
so with everything known up to the minute and all the risks of being at the end of the cycle the bond market has quite a huge spread all ready built in.
the longer term bonds are paying 250x what a money market is . thats alot of compensation for the "if" of rates rising. shorter maturitys are still paying well over 100x more.
in fact larry swedroe did a great little study.
going back to 1980 larry tracked every year the fed raised the feds fund rate by 1% or more..
he then compared that rise to what the intermediate term bond market did and the results were pretty eye opening.
the barclays aggregate intermediate term bond fund was up every single time the fed raised rates with only one exception in 1994 when it fell 1.94%.
while hindsite is great the point is that while folks thought they were playing it safe from rising rates and hanging out in cash instruments the fact is not only were they guaranteeing themselves a loss after taxes and inflation but they could have been getting some nice returns on that money and didnt either because they listened to other ill informed people or they themselves were ignorant on the subject. .
Last edited by mathjak107; 09-30-2012 at 07:56 AM..
the legal advisors of the school boards would stifle any idea in that vein. or, lawyers would exploit the fledgling idea before it grew wings ---with good old fashioned "billable hours". however what I would suggest is the kids conduct the experiment with funny money. the ones who succeed with ROI or whatever can then write a report on what they did right and what their classmates probably did wrong (or did, in fact, do wrong). this report can be submitted with college applications if the kid is inclined to formally study finance at the college level.
Back in the day when I taught this stuff the parents ate it up and a number of them gave their kids the money to invest and they did and kept it up after high school. Again these were parents who knew and as a result had the resources to give their kids. Some of the parent purchased some of the funds/stocks we were tracking.
Back in the day when I taught this stuff the parents ate it up and a number of them gave their kids the money to invest and they did and kept it up after high school. Again these were parents who knew and as a result had the resources to give their kids. Some of the parent purchased some of the funds/stocks we were tracking.
and today's parents would look at you as if you had 5 eyes and spoke an alien language. however they can tell you which NFL team or American Idol won!
and today's parents would look at you as if you had 5 eyes and spoke an alien language. however they can tell you which NFL team or American Idol won!
No the same kids as parents now are doing the same for their kids as ours are doing for theirs. Inter-generational wealth is a goal for many Americans and they are doing what they need to do to teach their kids financial wisdom and to provide them the resources to be successful. They tend to cluster living together and to finance and create schools that are successful and teach success. They encourage their kids to hang out with other successful kids etc and perhaps most importantly they guide and are able to afford to send their kids to top colleges with other successful motivated kids from quality homes. Affluence tends to beget affluence. Many parents know that if they talk financial topics at the dinner table their kids are listening. I guess thats why mine are somewhere between Libertarian and fiscal hawks
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I understand what you mean. I was very fortunate and invested long term in two CD's that the interest rate was 5 percent. The investment manager at bank was trying to talk me out of it at the time, but I stood my ground. I am sure glad I did. I know the interest rates on CD's won't be that high when they come due. 
