Wednesday Assorted Links

1. Why Financial Literacy is So Elusive.

“It is bad enough that most people are not financially literate, but the painful reality is that investor education does not work — at least not much beyond six months. After that, it is like any other abstract subject taught in a classroom, mostly forgotten. . . .

Not that this has stopped states from mandating financial literacy for high schoolers. The Washington Post reported last week that financial-literacy classes are mandated by 19 states in order to graduate from high school, up from 13 states eight years ago. This is well-meaning, but without a radical break from how financial literacy is taught, it is destined to be ineffective.

Why? There are a number of reasons: The subject is abstract and can be complex; specific skills deteriorate fairly soon after graduation from high school; the rote memorization and teach-to-the-test approach used so much in American schools is ineffective for this sort of knowledge.”

2. Japanese office chair racing. Hell yes.

3. Remembering the runner who never gave up.

4. Six places in Europe offering shelter from the crowds.

5. What ever happened to Freddy Adu?

The heart of the matter:

“When he wasn’t scoring, he wasn’t doing much of anything. ‘He saw himself as the luxury player, the skill player,’ Wynalda said. ‘Give me the ball and I’ll make something happen.’ ‘OK, I screwed up, give it to me again.’ ‘OK, again. Just keep giving it to me.’ And eventually it’s like, ‘You know what? I’m going to give it to some other guy.'”

6A. The Surreal End of an American College.

6B. The Anti-College is on the Rise.

. . . a revolt against treating the student as a future wage-earner.

What People Get Wrong About Financial Literacy

Every spring a friend in North Carolina and I have a NCAA college basketball tournament bet. He takes the teams representing the Atlantic Coast Conference and I get those representing the Pacific-12. If his teams win more games, I send him a t-shirt, if mine win more, I anxiously await my cotton trophy. This year, neither conference did well, but I barely won a stylish long sleeve Guilford College tee*.

We met teaching and playing noon basketball at Guilford College in Greensboro, North Carolina, in the 90s. This year, along with the shirt(s—one for the Good Wife too, and a coffee mug, Christmas in April), he included four copies of recent Guilfordians, the liberal, liberal arts school’s student paper.

Reading them made it seem like time had stood still. Faculty salaries were still the lowest among a large comparison group of peers. Enrollment was down. Faculty morale was flagging. Some well-liked faculty were leaving to the disappointment of students. Students were protesting the administration’s salaries, which had increased markedly, and were at least average among the same comparison group. Tucked in one of the articles was a devastating detail that will make the new president’s job especially difficult. The small Quaker school has $16m in deferred maintenance. They budget $1.8m a year for continuing maintenance, meaning they’re eight years behind. Some students complained about mold in the dorms.

Colleges on the financial edge routinely defer maintenance. “Let’s delay the roof on the science lab another year.” Eventually, the quality of life for students and faculty suffers, and as with mounting credit card debt, the financial challenges multiply and trustees fret they’ll never catch up. Public schools, churches, and city council’s everywhere face the exact same challenge. Can we manage our finite revenue—whether bonds or levees, charitable contributions, or taxes—well enough to maintain our existing buildings, roadways, and parks? If you want to assess the health of a school district, church, or city, find out how much maintenance they have deferred.

We’re fortunate that our Washington State home backs up to beautiful woods that we’ve enjoyed for sixteen years. In the woods there are hiking and running trails, deer, owls, and a path to a nice city park. Now the woods are for sale and three different developers are interested. Many in our community who have organized to save the woods from being turned into another housing development attended the City Council meeting last week to implore the Council to follow through on their own five-year plan for creating more park space.

The organizing committee has done great work thinking creatively about grants and related funding that makes the purchase seem feasible. imgres But the city has been deferring maintenance on our existing parks. One includes a nice boardwalk along the Puget Sound, a walkway so neglected, parts of it will be closed to the public this summer. While sympathetic to our arguments, the city manager and council both regretted that the city can’t afford to purchase and preserve the woods because they’ve deferred far too much maintenance.

It’s human nature to put off saving for future expenses. Just like colleges, school districts, and churches, I do it all the time too. I replace my nicked up bicycle tires after flatting a few times. I get my lawn mower tuned up when it won’t start. I go to the doctor when I’m near death.

I talked to the college senior recently about car ownership. Most twenty-one year olds think exclusively about the purchase price, “If I can just save $5k for that $5k car.” I impressed on her the need for a “cushion” for additional costs like insurance, gas, and regular maintenance including oil changes, the battery, and tires. In an ideal world, she’d also factor in replacement costs, but that’s pie in the sky. Once I broadened her thinking about car ownership, she realized it’s not financially feasible yet.**

Most financial literacy talk is seriously flawed. Everyone overemphasizes technical knowledge. Do you know the “rule of 72”? Do you understand the power of compounding interest? Do you understand asset allocation, mutual funds, investing costs, dollar cost averaging, and taxes impact on your returns?

People think if schools just taught that knowledge all would be well, but it’s not that people don’t know enough about personal finance, it’s that they lack the self-discipline to spend less than they earn. Including legions of college educated people who would pass a personal finance multiple-choice test.

Schools can’t teach young people to defer purchases, to set aside money to adequately maintain and eventually replace possessions, to live within one’s means. The only way to teach anyone the limits of consumerism, to delay gratification, the importance of savings, and how to live within one’s means, is to model it for them over time.

Fortunately, my parents, especially my dad, taught me those habits without ever sitting me down for any sort of money talk. For colleges, churches, cities, and families, “deferred maintenance” means “We’re in the habit of spending more than we have.” Like mounting interest charges, it ties the hands of college administrators, church councils, city councils, and families.

We are extremely fortunate to be able to meet our family’s basic needs each month with some money left over. We can do one of three things with our surplus. 1) Succumb to status anxiety and buy unnecessary luxury items; 2) Keep existential questions about life’s larger purposes at bay through mindless consumerism; or 3) Set some of the surplus aside for anticipated future expenses.

* During graduate school, my friend was a UC Santa Cruz hippie. The UC Santa Cruz mascot is the banana slug. Second Born and I had lunch in downtown Santa Cruz in late January. After lunch we found a must have t-shirt that featured a large banana slug with the caption “SLUG LIFE”. The perfect gift for my next loss. So good in fact we decided I had to send it this year win or lose. He was very grateful and assured us he’ll get a lot of grief for it from his Geezer basketball pals. That, of course, was our hope.

** Odd to me that she’s not more motivated to make it financially feasible. At eighteen, I couldn’t wait to own my own car. So I parked golf carts and picked up range balls for a few years and bought a VW Bug for $1,500. Most gratifying purchase of all time. For the time being at least, in keeping with her peers, she’s perfectly content to bicycle, use public transportation, or, and maybe this is the problem, use her parents spare car.

Where’s the bottom?

In a late January post titled “Market Downturn” I wrote, “Our mutual fund company provides an unusually helpful service that helps me keep historical perspective. When I log on to its website there’s a “Portfolio Watch” that shows our asset allocation. Currently, it’s short-term reserves, 3.5%; bonds, 38%; stocks, 58.5%. Then there’s a link to “Historic Risk/Return, 1926-2006.” Average return, 8.8%. Best year, 35.7% (1933). Worst year, -25.9 (1931).

Then I added, “This won’t sell many papers or fill much time on cable television, but after an unusually strong six year run, the market is returning to the mean.”

What I meant to write was, “The market is mean, very, very mean.”

I was thinking the market might end down 10-15%. -25.9% was from so long ago, it seemed fictional. I doubt I was alone in not taking the previous worst case scenario seriously. If I had seriously considered it, my aforementioned asset allocation would have been more conservative. With five/six weeks left in the year, I’d be thrilled with the previous worst year of -25.9%.

Can’t believe I just wrote that.

Here are the first few sentences from Jason Zweig’s commentary in Saturday’s Wall Street Journal titled, “1931 and 2008: Will Market History Repeat Itself?”

“Over the two weeks ended Nov. 20, 2008, the Dow Jones Industrial Average fell 16%. Over the two weeks ended Nov. 20, 1931, the Dow fell 16%.  If you think that is scary, consider this: In the final five weeks of 1931, the Dow fell 20% further. Then it went on to lose yet another 47% before it finally hit rock-bottom on July 8, 1932.” Later he adds, “When the Dow finally stopped going down, in July 1932, it had lost 88% in 36 months.”

How does anyone learn to invest? My hunch is for better or worse most of us learn from our parents’ modeling and then trial and error. Sure some study it in school, but I suspect that’s a small number of people in higher education. Few K-12 schools do anything to promote financial literacy. 

I am self-taught. In my 20’s and then 30’s I inherited a little money, and although I wasn’t very materialistic, I wanted to be a good steward of it. I understood it represented a unique opportunity to establish more savings than I normally would be able to as an educator. So I parked most of it in CD’s.

In the meantime, I asked a wealthy friend in his 60’s for advice and he recommended his financial planner to me. I was a naive numbskull and followed the planner’s advice too passively. As a result, I ended up in poor investments that paid him nice commissions. It took some time and money to start over.

In the end, that setback was a blessing, because at a relatively young age, I realized no planner anywhere cares half as much about my family’s future as I do and so I resolved to educate myself. I began reading. The seminal book was Bogle on Mutual Funds. His writing was accessible enough for me to understand and embrace his recommendations regarding asset allocation and passive index fund investing. I knew I wasn’t smart enough to pick individual stocks and was relieved to learn I didn’t need to be.

Starting over, I invested in low-cost index mutual funds right as the bull market was beginning. Long story short, by the end of the 90’s I felt like making money in the markets was a piece of cake. 

Fast forward to this week when my brother asked me the conventional question a lot of people are wondering, “Where’s the bottom?”

Of course the only people who really care about that question are those with cash reserves. I’m not among them so I’m not obsessing about perfectly timing the bottom. Each Friday I think if this isn’t the bottom it’s darn close and if I had cash reserves, I’d go in now. Then, after this morning’s run, I read Zweig’s commentary over a mountain of cereal, and felt like hurling.

Maybe I’m wrong again and there’s still along ways to go.

I suggest asking two different questions. First, what’s your time horizon? If you invest in stock index funds now with money you don’t need for five to ten or ten to twenty years, I’d invest now despite Zweig’s horrific historical data. Many index funds are on sale at 35-60% off their December 31, 2007 prices.

Second, what’s your “sleep at night” asset allocation? If you’re distracted on a daily and nightly basis by your portfolios declining values, adjust it. The downturn has adjusted mine all by itself. My former 3.5% cash-38% bonds-58.5 stocks split is now 3-47-50.

The litmus test of whether I’ve learned a valuable lesson from this historic downturn is whether I adhere to Bogle’s suggestion that your bond holdings should always equal your age. I turn 47 in February so right now I’m spot on.

What will happen when the market eventually picks up steam again though? Will I get greedy and “forget” to rebalance like many of my higher education colleagues did seven/eight years ago before the correction mucked up their retirement plans?

Please do me a favor. Every few years from now until I expire, stop me and ask, “Byrnes, what percentage of your portfolio is in bonds?” If I fail to answer quickly and clearly, and if my answer is not within 3% of my age, you hereby have my permission to rough me up.