The Lunacy of Sage Advice in Unprecedented Times -*- So Much for the Village Elders

[wiggin]

I'm pretty certain about the conservation of momentum; should I suspect the underpinnings of physics then? Obviously, economics and its associated disciplines are less 'fundamentally' true that something as basic as physics, but certain principles do have pretty good backing. To be honest, I think you and GG are confusing specific advice on a given economic situation with the underlying fundamentals of investing, which have to be applied to a given situation. For example, the details of someone's advice can be wrong (e.g. 'invest in Bear Stearns' just before its collapse), but the basic idea of investing in companies with strong balance sheets and decent revenue is not.

Secondly, you seem to be bringing up another, wholly different point in this last post. Now, you argue, it's not that the basic system's rules have changed, it's that people are overwhelmed by the complexity of the system and make poor choices. That's a much more defensible position; I agree that we can't expect every person to really research their investments as well as they should. I'm not sure the solution is to make a simpler (state run?) system, though - most of the complexity of financial products stems from the fact that they are fundamentally complicated, and that there isn't much certainty about a specific product's performance. Dumbing down the system by removing much of the financial innovation penalizes the people who want a nontraditional investment setup, and probably results in lower aggregate returns. I would argue that a much more effective solution would be some more clearly mandated standards to compare various investments - up front disclosure of fees (and perhaps rules about which fees one can charge, for easier comparisons), etc. But to be honest most of this information is already legally mandated for most common types of investments, and the information is all there for people to look at. The complexity is largely due to all of the legally-required disclosures; most people just ignore it and make poor choices.

[Being]

Wiggin, the problem is that complexity allows unforseen manipulations that undermine conventional wisdom and strip regulation of the power required to balance fairness with faith in the markets.

[EyeKhan]

I'm pretty certain about ....

#1, the analogy is invalid. #2, the most basic fundamental of investing, as the common person experiences it, is that its essentially gambling.

Secondly, you seem to be bringing up another, wholly different point in this last post. Now, you argue, it's not that the basic system's rules have changed, it's that people are overwhelmed by the complexity of the system and make poor choices.

The complexity is aggravated by the constantly changing conditions. A hundred years ago people relied on sticking money in their mattresses and the compassion of their children. Sixty years ago it was the defined pention programs. Twenty years ago it was the 401k. Now what do we have? Bankrupt pension programs because program managers were allowed to gamble - and lose - them in the stock market while shorting contributions based on unrealistic projections of returns. So the solution to that fuck up was to have individuals gamble their own money in the stock market, and of course lose. Hey, I know, lets put social security in the stock market, maybe the third time's the charm.

I'm not sure the solution is to make a simpler (state run?) system, though -

Maybe people shouldn't have to rely on gambling in a too-complex-to-understand and likely loaded system to provide for their health and welfare when they can't work anymore. This model of retirement care is fundamentally a fucked up joke. Its more about allowing savvy investors to harvest money from the rest of the population.

[Loki]

Yeah, how dare people who are skilled at something take advantage of those skills. It's blasphemous.

[EyeKhan]

Yeah, how dare people who are skilled at something take advantage of those skills. It's blasphemous.

I'm so glad you're here! Let us pray, the Market shalt fix it.

[Being]

Yeah, how dare people who are skilled at something take advantage of those skills. It's blasphemous.

Loki, it wouldn't be an issue if they were generating new wealth. The problem is the current trend of siphoning existing wealth away from those who can least afford to lose it. It's especially distasteful when the losers have presumably followed all the rules.

[EyeKhan]

America spells competition, join us in our blind ambition
Get yourself a brand new motor car
Someday soon we'll stop to ponder what on Earth's this spell we're under
We made the grade and still we wonder who the hell we are.

[Loki]

Loki, it wouldn't be an issue if they were generating new wealth. The problem is the current trend of siphoning existing wealth away from those who can least afford to lose it. It's especially distasteful when the losers have presumably followed all the rules.

Do tell how they siphon off existing wealth.

[EyeKhan]

Do you have a 401k yet?

[Loki]

You probably make more in a season than I make in a year.

[EyeKhan]

You probably make more in a season than I make in a year.

But the rules say:

a. start putting money into your 401k asap - the younger the better (the miracle of COMPOUNDING!)
b. every little bit counts - a buck, ten bucks, a hundred bucks - no amount is too small.
c. just set up an automatic withdrawal from every pay check and soon you won't even miss it.

[Loki]

The rules say you have to be making enough money to cover expenses first.

[EyeKhan]

The rules say you have to be making enough money to cover expenses first.

Do you actually have access to a 401k? Are you technically part time or temporary employment?

[Loki]

Do you actually have access to a 401k? Are you technically part time or temporary employment?

It's not full-time/part-time here; it's percentage appointments. I'm on a high enough appointment to get all the benefits. No idea about a 401k; grad students don't make enough to save anything. We're lucky if we break even.

[Being]

Do tell how they siphon off existing wealth.

How about you start a retirement account and get back to me with the results in twenty years. In the past we've discussed your assumtion of the continuation of the 8% average market gain. I showed you how 20 year lulls have existed. Well this current lull is not only extending beyond 20 years it is also losing people money.

[EyeKhan]

How about you start a retirement account and get back to me with the results in twenty years. In the past we've discussed your assumtion of the continuation of the 8% average market gain. I showed you how 20 year lulls have existed. Well this current lull is not only extending beyond 20 years it is also losing people money.

And the Sage Advice always said: Buy a house, as long as you're in a solid neighborhood the value will always at least hold but likely go up! Well, I just sold the house I owned for thirteen fucking years at 40k less than I paid for it and that's after putting 30k into hard upgrades. Mind you my city, state and region never had a bubble-run-up in housing prices. Just a crash.

The sages say: "Oy! That's never happened before. Wow, who woulda thunk it?" And that's the fucking point. Modern home ownership in the masses is only five or six decades old, and the "Ownership Society" concept even less. But every dick in the woods knew just what to do vis a vis home ownership. Well, I and everyone else in the country who had to sell a house in the last three years got royally fucked by that Sage Advice because guess what? They were wrong.

[Being]

And the Sage Advice always said: Buy a house, as long as you're in a solid neighborhood the value will always at least hold but likely go up! Well, I just sold the house I owned for thirteen fucking years at 40k less than I paid for it and that's after putting 30k into hard upgrades. Mind you my city, state and region never had a bubble-run-up in housing prices. Just a crash.

Yeah, that's a tough pill to swallow. And you didn't even mention the premium you were paying above the cost of renting instead of buying.

[EyeKhan]

Yeah, that's a tough pill to swallow. And you didn't even mention the premium you were paying above the cost of renting instead of buying.

Its extremely frustrating, let me tell you. Based on the Sage Advice, that was supposed to be at a minimum like putting money into a bank account so long as I took care of the house and the neighborhood didn't fall apart. I did, and it didn't. But because some jackasses in Las Vegas and LA (gigantic simplification, noted) spent a whole hell of a lot of money driving up property values to wholly unsupported levels, I lost my ass. Nobody could have predicted that and that's why when someone says "this is what you do" I'm not buying it. Anything can happen when your nut is at the mercy of the Market, especially insufficiently regulated markets.

[Loki]

And the Sage Advice always said: Buy a house, as long as you're in a solid neighborhood the value will always at least hold but likely go up! Well, I just sold the house I owned for thirteen fucking years at 40k less than I paid for it and that's after putting 30k into hard upgrades. Mind you my city, state and region never had a bubble-run-up in housing prices. Just a crash.

The sages say: "Oy! That's never happened before. Wow, who woulda thunk it?" And that's the fucking point. Modern home ownership in the masses is only five or six decades old, and the "Ownership Society" concept even less. But every dick in the woods knew just what to do vis a vis home ownership. Well, I and everyone else in the country who had to sell a house in the last three years got royally fucked by that Sage Advice because guess what? They were wrong.

If you want certainty, go to a communist country. Risk is inherent in a non-command economy.

[EyeKhan]

If you want certainty, go to a communist country. Risk is inherent in a non-command economy.

Yeah, ok. Remember the Soviet Union?

[Loki]

Yeah, ok. Remember the Soviet Union?

Yeah, for seven decades, everyone had a job and no one lost their savings.

[Being]

... Risk is inherent in a non-command economy.

Remember that when you watch your retirement funds dwindle away 30 years from now. Try not to complain too loudly lest someone brings up your post history.

[Loki]

See sig.

[Hazir]

Do tell how they siphon off existing wealth.

Ok, now you really have hit the rock bottom of lazy answers.

Oh, by the way, putting money aside for 15 years in a low risk fund got me a return that wasn't even on a par with if I'd put the money under my mattress.

[Loki]

Ok, now you really have hit the rock bottom of lazy answers.

Considering that Being makes absurd claims in every thread he posts in, I find that it makes no sense in trying to come up with reasonable counter-arguments until he actually makes it clear what his point is.

[Being]

Considering that Being makes absurd claims in every thread he posts in, I find that it makes no sense in trying to come up with reasonable counter-arguments until he actually makes it clear what his point is.

I have made my point perfectly clear. You simply deny reality and continue promoting the notion that history is the ultimate guide to economic stability. All the while ignoring recent history.

[Wraith]

The sages say: "Oy! That's never happened before. Wow, who woulda thunk it?" And that's the fucking point. Modern home ownership in the masses is only five or six decades old, and the "Ownership Society" concept even less. But every dick in the woods knew just what to do vis a vis home ownership. Well, I and everyone else in the country who had to sell a house in the last three years got royally fucked by that Sage Advice because guess what? They were wrong.

I remember things differently. Everybody who paid attention was saying there was a housing bubble and that it would burst sooner or later for years before it actually did. Many people ignored their warnings. I remember someone (not you, I'm pretty sure) taking shots at me because I said there was a housing bubble and that it was going to pop. "A lot of people say that, but it hasn't happened yet so it won't!" The problem wasn't that the information wasn't there or that the underlying rules that guide these things were wrong, it's that everyone was ignoring the information and underlying rules.

I'm sorry you took a loss on your home sale. It sucks, the timing is bad luck, and there was some risk anyways though maybe you got hit harder than most, but it doesn't invalidate everything people know about economics.

Does this mean you're retired now?

[Loki]

Plus haven't people been predicting the collapse of the Detroit-area economy for a decade now?

[']['ear]

Other then buying "as much house as you can afford" that is rock solid advice. Being in a good stable neighborhood is good for mental peace and getting your kids a good education. Making extra payments to principle is always good.

Exactly. I burst out laughing when I read "buy as much house as you can afford." That's OK if you have sufficient down payment AND you define "afford" very conservatively. My wife and I budgeted what mortgage payments we could afford based on this assumption: if we had half of our income at the time, we could scrimp and save and barely manage to keep the house. Anything more is unwise. Houses are terrible as investments, beyond being better than renting.

As for paying down your principle, why? Our mortgage is at 4.75%. Over 30 years, my retirement investments will yield much higher than that. With those kinds of mortgage rates, paying down early is as silly as paying off student loans early. You're citing dogma from a time when people had much higher interest rates on their mortgages.

Otherwise, I agree with Wiggin (and Fuzzy). People like to believe they live in unique times. That's the idiocy behind the "new economy crap" that got banks to put our entire system at risk. Guess what fellas? It's just the old economy with some assholes trying to pull the wool over your eyes.

I've met very few people who maxed out their 401(k) contribution and didn't get over their heads in debt that are having financial difficulties.

But you're not appreciating the issue of luck. For example, if your company moved you to certain parts of the country in, say, early 2008, you may have paid a premium for your house and then lost 50% of its value over the ensuing two years. A lot of people have lost their jobs, and unless you're wealthy that's going to cause a lot of financial hardship. So while I totally agree that the frugal measures described here are a great idea, it's no safety net. There are people with great financial hygiene who are really hurting.

PS another good rule of thumb: keep enough money for 3 months of frugal living in a liquid source. You can pay wicked penalties from removing money from retirement accounts, so you need a rainy day fund.

[EyeKhan]

I remember things differently. Everybody who paid attention was saying there was a housing bubble and that it would burst sooner or later for years before it actually did. Many people ignored their warnings. I remember someone (not you, I'm pretty sure) taking shots at me because I said there was a housing bubble and that it was going to pop. "A lot of people say that, but it hasn't happened yet so it won't!" The problem wasn't that the information wasn't there or that the underlying rules that guide these things were wrong, it's that everyone was ignoring the information and underlying rules.

The bath I took was a result of the bubble, and probably of the collapse of GM and Chrysler, but it had nothing at all to do with me participating in the bubble or of over inflated house prices in my region. I followed all the rules to the letter. The rules, which were wrong, never allowed for what happened. Which is my point.

I'm sorry you took a loss on your home sale. It sucks, the timing is bad luck, and there was some risk anyways though maybe you got hit harder than most, but it doesn't invalidate everything people know about economics.

Does this mean you're retired now?

The timing could not have been worse. I bought my new house pre-crash and sold my old post. Know about economics? Are you serious? The subject is as much about human behavior in the context of culture as anything else. It sure as he'll isn't a hard science you can ever know anything enduring about. Which again is somewhat my point.

Also, no, I'm nowhere near retirement. This is just an exercise in frustration and recognition that all the advisors out there with their rules of thumb are at least in part far too confident in their knowledge.