Couple's Therapy with a Payback!

We love our spouses and life partners, and we try to show that love with nice gifts.  In fact, every birthday, anniversary, valentines day, and whatever else you celebrate gives us yet another opportunity to show our significant other just how much we care about them.  But often, we don't do so well with the gift choice.  Hey, I thought all men liked watches.  Turns out my husband never wears one.  Never.  He thought all girls liked pearls.  Surprise!  

In our twelve years together we've bought each other a lot of the wrong stuff.  Probably thousands of dollars worth of bad gifts, followed by painful and ridiculous displays of false gratitude.  "Wow, a crystal sugar shaker!  That is just so thoughtful of you, honey.  How did you know?"    It's that game couples play.  We've all had to fake it at least once (if you have never had to fake it because your spouse is always the perfect gift giver, don't think you're going to win any friends by making a point of telling everyone).  In any case, your alternatives are to either:

A. Buy yourself a gift and thank your partner for it.  ("Honey, look at these awesome boots your just bought me!")

B. Tell you partner what you want them to buy you. ("Now go to Furla, and buy me the large satchel in Aubergine.")

C. Learn to pay close attention to the hidden message behind the hints your partner is dropping about what they want.

Years ago, a friend of mine gave me a book called Self Help for the Bleak by Rich Hall (Price Stern Sloan, Inc., 1994), which contains a bevy of fine advice on every topic.  In the Love section, he says:

"the most memorable gifts are those that say, "I was thinking about you, and I'd really feel awful if you died."  In other    words, it's a gift  that makes her feel safer.  Here are some sure-fire winners:  

A brand new set of steel belted all-weather radials

A radon dector

Pepper Mace for fending off grizzlies

Orange reflective clothing of any kind

But always include flowers or poetry! You don't want to give the impression you're unsentimental."

So after years of pretending to love jewelry that I didn't, I have started coming to terms with the fact that I am the one who's unsentimental.  The best gifts I've received are the Bose Noise Canceling Headphones my husband gave me 3 years ago and the Breville Personal Pie Maker my sister just gave me.  Yes, it turns out that I'm that girl who likes a nice, functional device or appliance.  Taking notice of all this, my dear, astute husband hit the nail right on the head when I had a birthday a few weeks ago.  He bought me a Jawbone Era, simply the coolest bluetooth earpiece ever.  You shake it twice and it instantly pairs with your iPhone, and it has apps you can download that enable you to text and email hands free!  Is that cool, or what? And it's beautiful, too!  He didn't even read the book, and he got me "a gift that makes her feel safer", because I can now talk, text, etc., hands free!  And he even fulfilled the second part of the Rich Hall instructions by including something sentimental ---- he wrote me a song!  It was an awesome birthday.

Instead of spending untold fortunes on golf clubs or perhaps a tattoo you might regret, pay closer attention to your partner's signals, and give them what they really want, not just what you think they want.  Who knows, maybe your partner even likes free stuff, like the pleasure of your company.  You could even go crazy and throw in a couple of beers.  Then you can put the money you saved toward paying off all that credit card debt you ran up buying all those bad gifts over the years.

I'm still trying to figure out what my husband is REALLY saying when he "hints" he wants yet another guitar……hmmm….

Your Budget is Failing Because of Glenn Close

Something very interesting happened at Target last week.  High end fashion design house Missoni created a special (cheap) line for Target, and last week it went on sale.  Crazed shoppers stood in long lines from before dawn for a chance to get their hands on anything from the Missoni collection.  For those who don't follow the world of fashion, real Missoni dresses typically sell for thousands of dollars, and the Target line included skirts priced around $40.  Anyway, by 9 a.m., the racks were empty and the area designated for the Missoni merchandise looked positively war-torn.  I listened to reports from the scene, describing shoppers going into an absolute frenzy, indiscriminately clearing off entire shelves of every item and size, maxing out their credit cards at the check out, and fighting other shoppers for possession of just one coveted item.  

But how can this be??  Aren't we in the middle of the worst recession since the great depression? Isn't everyone's scared and cautious with their spending?  So what, all of a sudden everyone went completely nuts?  I mean this was not a case of carefully selecting a high quality item with which to treat yourself, this was a complete and utter chaos!  

It's just that we have been so careful with our budgets.  We have mastered the art of self deprivation.  We will forgo all those frivolous, momentary pleasures for our lofty, long term goals!  We will practice extreme couponing!  We will pay down our debts, and we will save to send little Billy and Suzy to college, and we will max out our retirement account contributions like good upstanding citizens.  We will teach our children the difference between wants and needs, and we will start acting like mature adults, damn it!  We will be austere, and pretend we enjoy staycations, because the future is more important than the now!

Until Target releases a cheap line of Missoni.  And then we will BINGE!  Because when we see a Missoni skirt for $40, all this careful budget stuff goes right out the window.  We hear a voice in our heads ----- an old familiar voice, the voice of our inner child who desperately needs the Ben10 Ultimate Omnitrix watch, and has no concept of anything beyond RIGHT NOW.  The voice screams  "I NEED THAT"!  And strangely, the voice of our inner child sounds just like the voice of Glenn Close as she tells Michael Douglass, "I'm not gonna be ignored, Dan!" (Fatal Attraction, 1987)  And the voice is the reason why budgets generally fail.  

Psychologically, we can't handle extreme deprivation for long.  Ever go on a no-carb diet?  We need some occasional rewards for our good behavior.  We have to build into our budgets a category for treating ourselves to something nice here and there.  It can be an overpriced latte in the morning, or a nice manicure --- whatever makes you happy.  I like kitchen gadgets.  You decide how much you can allow yourself, based on your income and debts, but don't leave this category out.  In the end, this strategy will give you a much better shot at achieving your financial goals.  And you won't go on some weird shopping bender and find yourself buying the $3,000 Saeco Xelsis Digital ID Fully Automatic Espresso Machine. (I'm totally not making that up: http://www.bedbathandbeyond.com/product.asp?SKU=17848658&RN=278&.)

Is it still a good time to invest in children?

About a millisecond after the kids go back to school, we parents are not asked to donate money to the school, as much as we are asked to "invest in our children".  Well, as a financial planner, I feel compelled to investigate that idea.  

Let's start with the classic definition of an investment, which is  an asset or item that is purchased with the hopes that it will generate an income or appreciate in value in the future.  

I'm not at all certain that kids meet these criteria. Whether or not we ever see a return, we don't purchase our children, and I generally consider mine as more of a liability than an asset.  Also, I'm not sure about appreciation, because children are hard to appraise monetarily, and we aren't allowed to sell our kids (despite frequent temptation).   But if we're really lucky, they might generate an income.  

If you're a farmer, having kids can probably be a good investment.  They help plow the fields, and such.  But it's hard to evaluate the investment quality of a child because we can't easily use the typical methods of comparing the returns to those we might expect on other types of investments.

And what kind of investment is a child, really?  To which asset class does a child belong?  Is a child like a bond?  Where you lend money that get's paid back year after year with interest?  Well, no, not really.  mostly you just pay and then pay some more.  So are kids more like depreciable business assets that get written down bit by bit over the years?  Hmmm, that actually sounds more like a description of the parent.

ok, so what about stocks?  Well, just like a stock, a child can presumably go up or down in value, but as mentioned earlier, you can't sell them to capture the gain in value, nor can you harvest a tax loss by unloading a child when his or her value has degraded.  Also unlike stock in XYZ corp, children generate constant upkeep and maintenance expenses.  We're talking about at least 18 years (and possibly quite a bit more) of payments towards an asset (i.e. the child) with a highly uncertain ability to create a positive cash flow.  Moreover,  a stock can go down to a value of zero, with the investor losing all the money he put at risk, but a child could potentially put at risk a great deal more than your initial investment, and leave you in a position of unlimited losses.  

Generally, investors would need the potential for tremendous returns in order to compensate them for assuming such risk. The odds are so long that your Return on Investment (ROI) would ever exceed the capital expense. 

But parents are irrational and we have some biological compulsions to breed, whether or not we consider the return on our progeny.

So it seems that a child is less like a stock investment and more like a very bad annuity.  You pay in to the policy month after month, as the premiums continue to rise, but with no guarantee that you will ever live to see a payout.  I don't even want to think about the surrender fees!  The annual appreciation is not monetary, but emotional (or as your credit card company says: Priceless), however, in the best case scenario, your kid will make enough money to take care of you when you're old.  Additional children are like additional insurance policies, increasing the probability that SOMEONE will take care of you (thereby lowering your risk).  If you've done your job well, your child can be like a little deferred annuity policy with a lifetime payment guarantee, shifting the risk from you, in the early years, to the child, in the later years, and it's a fairly effective hedging strategy against the possibility of outliving your money.  So in that sense a child is really the ultimate investment!  

So go write a big fat check to your kid's school!   Otherwise you'll feel terribly guilty when you're sponging off him later.

How to Make Yourself Feel Better When the Market Plummets

You look at the headlines, and the market is dropping.  I mean really dropping.  Hundreds of points.  The headlines are dramatic, with words like "bloodbath", "bloodletting", and the day ends with "blood on the street".   You feel bad.  Really, really bad.  You've lost a bunch of money.  You don't even know how much, but it must be a lot.  And the reason you feel so terrible is because you feel stupid.  You know that somehow this is all your fault.  You shouldn't have been putting your money in the stock market; You should have read all those articles;  you should have allocated your portfolio better;  you shouldn't have bought that European fund.  You kick yourself for being so dumb.   And then you feel much worse.  And since you're feeling so worthless you decide to really torture yourself by actually checking your portfolio value.  You lay there wallowing in the pain and humiliation of watching your net worth dwindle.  But hey, why stop there?  While you're at it, why not go for an in depth exploration of all the other pain you've caused yourself in life?  Or perhaps the pain you've caused your mother?

So there you are, feeling rotten.  The market just dropped about 10%, and when you filled out that risk-tolerance assessment questionnaire you just never imagined that in real dollars and cents it would be this painful.  The experts tell you to hang on because the market will come back and you'll feel really dumb if you sold at the bottom.  You know that after the market fell apart in 2008-2009 it sprung back about 100%.  But you still feel awful.  Then suddenly it occurs to you that the people who are much richer than you probably lost a lot more money, because 10% of their net worth is a lot more than 10% of your net worth.  And then you think of someone REALLY rich, like Oprah.  She's apparently worth about $2.7 billion, according to Forbes.  You calculate that 10% of $2.7 billion is $27 million.  You imagine what it would be like to lose $27 million, but you can't, because you can't imagine HAVING $27 million (if you DO have $27 million, just play along and don't rub anyone's nose in it).  And you wonder, did Oprah just lose 27 million dollars?   Does she know about it?  Does it bother her?  Does she feel stupid about it?  Well, if she DOES, you wonder if she feels more stupid than you because she lost a lot more money, and if she DOESN'T feel bad about losing $27 million, then what are you so worked up about?

Money is such an abstract concept.  We humans went from being hunter-gatherers, to being barterers, to using currency, and our brains still haven't really managed to make sense of it all.  Rather than creating or gathering all we need right NOW, we receive a certain number of dollars for goods or services we provide, and we trade those dollars for food, shelter, iPads, braces for the kids, trips to Mexico, and what we think we will need to cover our living expenses when we're old, based on random guesses of how long we think we will live and how expensive our healthcare will become.   And we're not naturally very good at thinking about anything besides RIGHT NOW.  So we try to stockpile our money (or as investment philosophers call it: the return on our human capital) for the abstract and unknowable concept of our future needs.  

Based on all that uncertainty, how can you ever know if you have enough?  And that's really the question:  How much is enough?  And then you look at the value of your portfolio, and you try to figure out what's the correct level of bad/stupid you SHOULD feel.

And then you think about someone with much less money than you.  You think of that broke musician friend of yours who's always just barely scraping by.  That friend has no savings or investments at all, so all this means nothing to him.  He lost no money at all during this market selloff.  He probably doesn't feel any differently about himself now than before all this.  He's not kicking himself and feeling stupid.  He may not even have heard that the market just tanked.    

So if you were broke too, you wouldn't be kicking yourself either.  But you would still be broke, rather than just down 10%, and that 10% isn't anywhere near Oprah's $27 million, which you imagine would probably feel worse to lose, so you start feeling a little better about yourself.  You may be dumb, but you're not stupid enough to have lost $27 million dollars, and you're not completely broke, which is good because however much you're going to need in the future, it's definitely more than zero.  

See how smart you are? 

Now go reward yourself with some chocolate, and later you can find a new reason to kick yourself.  Maybe for indulging in too many sweets.  Does that bring us back to Oprah?

Only Donald Rumsfeld Can Predict the Future

When the U.S. invaded Afghanistan looking for Osama Bin Laden, then Defense Secretary Donald Rumsfeld appeared in a news conference to announce the following:

"We do know of certain knowledge that he [Osama Bin Laden] is either in Afghanistan, or in some other country, or dead."

Well, that pretty much covers all the options.  I mean, it's hard to ever be wrong with a statement like that.  So this has become one of my favorite quotes, because it can pretty much be applied to all predictions.  Especially financial predictions.  Do you ever read those headlines in the financial section that ask things like "Is the market just taking a breather, or is this the beginning of a bear market?"  Well, yes, it's probably one of those two things.  Or neither.  Or the articles that tell us how "technical analysis suggests that if the market breaks above 1200, then we might really see it go much higher from there."  Well, yes, we might.

We all want to know what the market is going to do next, and we think there must be some really smart person out there who knows, and can save us from making a terrible mistake and losing tons of money.  But the smartest people out there know better than to try and tell you what's going to happen, so they tell you what COULD happen, which leaves them generally safe if it doesn't.  

Now periodically, someone boldly claims he KNOWS which way the market is going next.  None of those wishy-washy "could's" and "might's", just "wills", and "musts"!  They command you to "get out of healthcare now!" or "buy energy stocks now!"  And who ever calls them on it if they're wrong?  Nobody!  By then we've already moved on to the next headline, and we've forgotten who said what last week.

So a few months ago, Bill Gross, probably the biggest bond guru out there, told everyone to get out of US treasuries, and his fund dumped the bonds en masse.  Ooops.  Yesterday he said, Remember what I said a few months ago?  Yeah?  Well, that was clearly a mistake.  So if Bill Gross made a wrong call on bonds, doesn't that mean that everyone else has at least as much of a chance of being wrong as of being right?  No matter who tells you they know what's going to happen next in the financial markets, they don't.  Not your neighbor, your stock broker, or even the REALLY big experts.  They're just playing odds.  The only proven method for improving your odds of successful investment is to diversify your portfolio so that you have some of those  "could's" and "might's" covered.

Okay, so what did we learn here today?  We learned that no one can predict the future, except Donald Rumsfled, because his predictions cover the full range of possibilities.  If you want to successfully predict the future, just name all the possible outcomes and you're good. 

So the next time you read a headline that asks, "Is this the time to buy Apple?" Think of Donald Rumsfeld, who also said:

"I would not say that the future is necessarily less predictable than the past. I think the past was not predictable when it started."