Good sense has vanished from many areas of American life including how families manage their money, says economist and television commentator Ben Stein.
"You've got to correct your spending patterns so that you're saving every week or every month," Stein says. "You've got to correct your spending so that you're not even remotely spending more than you earn. You've got to live a life of good sense."
Legions of consumers lived well beyond their means and failed to save for an emergency. It's the financial mayhem that ensued that still burdens the economy. In "The Little Book of Bulletproof Investing," Stein and co-author Phil DeMuth provide guidance to investors who still may be a bit gun-shy about losses.
They offer a variety of do's and don'ts to help readers make sound financial decisions, not just in the stock market. This includes everything from career advice, to purchasing a home in a chapter called "Houses of Blues."
Stein offered additional insight in a recent interview with the Associated Press:
Q: With all of the personal finance titles out there, what is this book adding to the mix?
A: We had an incredible financial debacle from 2007 to the beginning of 2009. We're still seeing the effects of it. We're trying to get people to bulletproof their portfolios so that if there's another financial debacle — and almost certainly in the next 20 years there will be one — people will not be as badly affected.
We would like people to have a portfolio which has a reasonable chance of making gains, but is also somewhat insulated from loss. We give you a variety of portfolios you can choose called tangent portfolios. The idea is that if you're willing to accept a loss of such-and-such percent, we can assure you that, based on historical patterns, your future gains will likely be within a certain range.
But all of the portfolios have a tremendous amount of diversification so you won't have a loss even remotely comparable to what the stock market went through in late 2008, early 2009.
Q: Do you think investors' biggest mistake was not fully understanding their risk tolerance?
A: I think investors' biggest mistake was their trust in Wall Street. It turned out that Wall Street was just lying their heads off to us. It turned out that the rating agencies were just making up things. It turned out that the big investment banks were selling us garbage and telling us it was gold. I think investors were trusting in the people who worked for them on Wall St. and in various other capacities to tell them the truth. And those people did not tell them the truth.
Q: So with that sense of distrust, do you think consumers should have any faith in possible reforms?
A: I don't see any meaningful reforms coming out of the government either under Republicans or Democrats. The way it works is that everybody who works on the regulatory side is thinking that, "In a few years, I'd like to get out of here and work for Goldman Sachs." So they're not going to come down to hard on Goldman Sachs. Or they're thinking, "I'd like to get out of here and work for the law firm that represents Goldman Sachs. I don't see any meaningful reform coming out a long as the system is so stacked in favor of the investment banks and the law firms that have all the money.
Q: Your book says people shouldn't put faith in claims that, "this time it's different." Still after all consumers have been through lately, might investing behavior change?
A: When we had the correction down from 14,000 down to roughly half of that, I remember getting a letter from one of my many brokers saying that "buy-and-hold is out, you've got to pick stocks and trade them." I remember writing back to him, that that's never worked for the individual investor. Never in history has that worked for individual investors, why will it be any different now?
Well it turned out buy-and-hold was a good strategy. If you'd held your stocks from the beginning 10 days of March (2009) until now, you would have made a fantastic recovery, just an absolutely breathtaking recovery.
The fundamentals of investing really should not have changed. You should diversify, you should not try to pick stocks, you should not go for the hot sectors, you should not go for stocks that have no earnings, you should not try to out guess people.
Q: And look for some of the tried-and-true companies, yes?
A: We like stocks that have been in business a long time, that have a good solid track record and have good financial fundamentals. But we don't even think we can pick those. We think just pick index funds. Just let Vanguard or Fidelity do the picking for you and just pick everything.
Q: Because it's such a big issue for so many families, what are your thought on the unemployment outlook.
A: It's a catastrophe. Unemployment is a catastrophe. If you are unemployed for a prolonged period, unless you are a wealthy person or have wealthy parents, you are in such bad trouble financially and emotionally it's almost unbelievable. I don't know what to say about that. It's just so bad it's unbelievable.
That's why people have to choose careers in which there is generally low unemployment, but that hasn't worked recently. When I was in law school if you were a halfway decent student you had three of four offers for your services. I didn't have three or four offers because I had long hair and I was surly hippie, but I had a couple of offers. Now, even very good law students can't get jobs. So what job you choose I'm not quite sure.
You must have a reserve to tide you over in a period of financial distress and it must be a meaningful amount, it can't just be a few thousand dollars. It should be a very good multiple of your yearly income.
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