Welcome to my humble blog and the 329th edition of the Carnival of Personal Finance. I have been participating in the Carnival of Personal Finance since the 175th edition, way back in 2008. It is my honor and privilege to host the carnival this week. I certainly hope you enjoy it.
California Dreaming Theme
I figured everyone could use a cool break from the blazing hot summer. So, I thought we would cruise up the California coast together. Just imagine the sea breeze blowing, surf music playing, surfboards in the back and the warm sun shining. After all, the summer is officially over and soon it’s going to be a long dark winter. Let’s all enjoy the sunshine while it lasts.
Editor’s Choice
I selected articles for the Editor’s Choice award, based on how interesting and informative they were. Congratulations and well done to the winners.
San Diego is known as the Birthplace of California. It is now the 8th largest city in the US and the 2nd largest city in California by population. Neighboring communities include Del Mar and Solana Beach. Famous surf breaks include Cortes Bank and Black’s Beach at Torrey Pines. Popular tourist destinations include Mission Bay, Sea World, Balboa Park and the San Diego Zoo. Popular activities include the Unlimited Hydro Boat Races and Over the Line Softball Tournament.
Carlsbad, located in North San Diego County, is one of the highest-income areas of the US. It also developed the world’s first skateboard park in 1976. Popular surf breaks include Moonlight Beach and Swami’s in Encinitas. Neighboring communities include Encinitas and Oceanside. Popular tourist destinations include Legoland and the San Diego Wild Animal Park. Popular activities include golf and tennis at the La Costa Resort and visiting the flower fields of the Carlsbad Ranch.
The biggest Money Fail I can possibly think of is for someone to work their entire life for low wages at dead-end jobs. Not everyone aspires to be wealthy or to rise to the top of the corporate world. But, to work so hard, get paid so little and have no opportunity for advancement is a definite fail. I’m not talking about someone choosing a low-paying profession because it’s their passion and they enjoy it. I’m talking about being stuck in a dead-end job because they never made the effort to pursue a career. Millions of people are in this predicament and it’s getting much harder to live on minimum wage.
This is the second post in a series of Money Fails.
The most common way to wind up permanently employed in dead-end jobs is to wander through life without a plan. It starts in high school when people suddenly graduate and don’t know what to do with their lives. So, they take a menial job and work just hard enough to keep it. Or, they go to college and take some classes that sound like fun, but they soon get bored and drop out. Each new job is in a different field, so they always start at the bottom. Or, they jump ship for a small raise, with the same title and no career advancement.
The problem is that time passes and opportunities start to disappear. Any work experience is fine on a resume when someone is in their twenties. But, if they are still wearing a name badge in their thirties or forties, the train has left the station and the ship has sailed. It will be very difficult to break into high a paying career at this stage in their life.
Meaningful employment that pays well often follows a career path. In the trades, people start off as apprentices and work their way up to journeyman. It’s similar in the corporate world, although people usually start out as summer interns or in junior positions out of college. The point is people work up to high paying positions, after years of gaining contacts and experience. Despite what many college students think today, they won’t be starting out making six-figures. They will have to exhibit some combination of passion, skill, hard work and personality to move up the corporate ladder and make big money.
Acquiring Skills & Education
There is an endless debate about the value of college and whether or not it’s a good investment. The quality of many college programs has dropped dramatically at the same time the costs have skyrocketed. And, there are a much higher percentage of people with college degrees chasing a shrinking percentage of high-paying jobs. There are a lot of people with expensive college degrees and six-figure student loans who are working at Starbucks. If teens are trying to find themselves, it’s way cheaper to backpack around Europe than to squander four years in college.
In my opinion, the value of a college degree depends entirely on a person’s career goals. If someone is getting a degree just to check a box on a resume, it may not be worth it. This is especially true for degrees that haven’t prepared a student for a specific role in the workplace. Fortune 500 companies aren’t hiring many aspiring anthropologists. But, they do need a lot of engineers, chemists, information technologists and accountants. For those who have decided on a specific professional career, there is no substitute for a relevant college degree and work experience.
Last month, I went out to dinner with a group of people and someone hit me up to float their meal. It was Thursday night and they were broke. Thankfully, I had plenty of cash with me, so it wasn’t a problem. I have been there myself a number of times and I know how it feels. I also know that it’s no way to live. It is so much nicer to have the money available to handle a situation.
This is the first post in a series of Money Fails.
One of my biggest problems when I was in my early 20s was that I was Friday rich. I would drink up all of my money clubbing on the weekends and then I would scrimp through the rest of the week until payday. Sometimes, I would run out of gas or have to skip lunch, but I didn’t consider it a problem. I was having a great time and saving money was the furthest thing from my mind. After I experienced a couple of financial setbacks, I realized it was a huge problem. I almost lost my car and my apartment.
The problem with the payday mentality is that it becomes a lifestyle. Instead of thinking about the future, people are thinking about payday. This is a cycle that repeats itself over and over again. Bad habits are hard to break and bad financial habits are the worst. In order to become successful, people need to think long-term. Nobody gets ahead in life by dropping back to zero every week.
Living on the Edge
Most people today don’t fear debt like our parents and grandparents did. They have been conditioned to think it’s OK to owe money on the things you want. Some kinds of debt are even considered “good” debt. But, all debt carries a risk. It’s called a liability for a reason. If your income stops or you can’t afford to make the payments, you start to lose all of the things you worked so hard for. And, people have a lot of unnecessary stress and anxiety related to the debt.
The problem with living on the edge is that it only takes a small financial setback to push someone over a cliff. And, this small setback is going to happen sooner or later. An accident, illness or layoff can set someone back for years. They may lose their place and have to start over. And it’s completely avoidable, by saving a little money each week. Being broke on payday is an indicator that something is wrong. It’s a red flag that you are taking too much risk by having no cash reserve.
The following is a guest post from Rob Bennett of A Rich Life. Rob is a tireless critic of Buy and Hold investing. Instead, he recommends Valuation Informed Index investing. If you lost a bunch of money in the market, you should read this post.
I’m not a Buy-and-Holder. I believe that Yale Economics Professor Robert Shiller’s research has shown Buy-and-Hold to be a gravely flawed strategy and that Valuation-Informed Indexing (which teaches that investors must change their stock allocations in response to big valuation swings) is far more sensible and effective approach.
Shiller published his research showing that valuations affect long-term returns in 1981. The obvious question is — What took so long? Why is it that it is only in recent years that large numbers of investors have begun to wonder if Buy-and-Hold is dead?
I can offer six explanations.
1) The implications of Shiller’s research are so far reaching that even his supporters do not yet fully appreciate them.
Shiller showed that valuations affect long-term returns. To know what affects returns is to know what causes them.
What Shiller really showed is that overvaluation causes poor returns. His research is showing us for the first time in history how stock investing really works. Valuations are key.
Once we learn how stock investing really works, we become able to avoid the risks of stock investing. For those who understand Shiller’s research, stocks are a significantly less risky asset class than they are for all others.
This is of course wonderful news. But it is not news that is easy to accept. Most advances in knowledge are
achieved in small steps. The Shiller Revolution represents a huge leap forward. It is taking us some time to absorb how much we have learned.
2) In practical terms, Buy-and-Hold caused no problems for 15 years after Shiller published his research.
Buy-and-Hold never “worked” in an intellectual sense. It is rooted in a false premise (Buy-and-Hold assumes the efficient market theorized by University of Chicago Economics Professor Eugene
Fama).
Still, in a practical sense, Buy-and-Hold worked just fine from 1981, when Shiller published his
groundbreaking research, until 1996, when stocks prices first rose to insanely dangerous levels. Both Buy-and-and-Holders and Valuation-Informed Indexers go with high stock allocations at times when prices are reasonable. So Buy-and-Holders were adopting proper stock allocations for the wrong theoretical reasons for those 15 years. It was a case of “no harm, no foul.”
This week, I read on The Daily Ticker that 25 of the top 100 highest paid CEOs had higher salaries than their company paid in federal income taxes. This is the most bizarre statistic I’ve ever read. I don’t know what is more ridiculous, that companies paid their CEOs so much or they paid so little in taxes. Either way, it’s a slap in the face of hard-working Americans, who shoulder a heavy burden from the bailout of failed American companies.
Are CEOs that Valuable?
CEOs made 325 times the pay of an average American worker in 2010. This is up dramatically from the 269 times in 2009. The ratio was around 24-1 in 1965, 30-1 in the 1970s and 40-1 in the 1980s. American CEOs are paid considerably more than their counterparts around the world, even though many American companies lag in performance. For example, an American CEO makes 16 times what a comparable CEO makes in Japan. The S&P 500 has been flat for a decade, while executive compensation skyrocketed. So, the high-paid CEOs aren’t returning value to the shareholders either.
In my opinion, the excessive pay for CEOs is hurting companies and investors, instead of benefiting them. Between the high pay, stock options, severance packages and outlandish perks, it is definitely hitting the bottom line. Companies who have held the line on pay have had no problems obtaining executive talent or performance. And they attract executives who are more focused on the growth of the company than their private jets and villas. It’s only a matter of time before shareholders start to revolt against excessive pay. I just wonder what is taking them so long.
Are CEOs Out-of-Touch?
One of my wife’s favorite TV shows is Undercover Boss, where the CEO goes undercover at their company to see how it is run from the bottom up. If you have ever watched this show, it quickly becomes a rerun after a couple of episodes. Every week the CEO struggles to keep up at work. They befriend a financially struggling employee and keep a promissing employee from leaving the company. The show almost seems like it was scripted by a PR firm.
Observations from watching Undercover Boss:
CEOs have no clue how daily operations run at their company.
CEOs fail at any job requiring technical skill, labor or hustle.
CEOs have no idea how hard it is for their employees to survive.
This leads me to wonder out loud if CEOs are worth even a fraction of their salary. In fact, I will declare right now that most CEOs are not only grossly overpaid, they are marginal leaders and a poor value to shareholders. The facts definitely back up my opinion. There are still some great CEOs in America, but they seem to be few and far-between.
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