Market Musings Blog

In our first post on how to get rich, we counseled saving money. The point of this exercise is not only to accumulate a few bucks, but also to get into the habit of looking for places to save money. That will serve you well, all your life.

Here is our second secret:

Be Patient.

Yes, I know, it seems so… mundane. And as Americans, we are notably impatient.  But patience is much overlooked in the quest for wealth. Articles, books, advisers – they all focus on what to buy, only rarely what to sell, and never how to behave once you own what you bought.

Ok, you have to start with a reasonable investment. You can’t buy a dud and be patient and expect great results. But what is wrong with buying a blue chip company or two and holding it for a long time? Basically what you want to do is turn the line on the right, which is how nearly all investments look in the short term, into the line on the left, which is how good investments look over time:

                                 Even if you are not that ambitious, and all you buy is something with a 4% yield, patience pays off. A 4% investment will net you just shy of 50% more than you started with after ten years.

So: save money, and be patient. These are the simple secrets to getting rich.

This is a two part blog on how to get rich. It is two parts because there are only two things you need to know. This part is about the first of those things:

Save money.

You do not have to save a lot of money. You only have to get into the habit of saving money. Here are some ways to save money:

Buy your jeans at a thrift store. When you want something expensive, make a deal with yourself to give an amount equal to its price to charity. This seems like it is a way to spend more, but if you keep your promise to yourself, you probably will not buy that expensive thing. Shop for car insurance every few years. Shop for home insurance every few years. Audit your own phone bill. Every time I do this, I find that I am no longer using a service that I am paying for, or that there is a new, cheaper plan for what I am using. Vacation at home. Buy a cookbook and cook at home more often than you go out. Quit the gym and exercise at home with DVDs or just on your own. Invite a neighbor if you need moral support. Turn something you like to do into a sideline job; save the money. One nice thing about spending your time this way is – you won’t spend it shopping. Buy a French Press/cappuccino machine/burr grinder and make coffee at home/in your office.

Think of ten more things that apply to your life and try them too. Make a game out of saving, and you will begin to notice more money in your wallet every month.

Next post: the second secret to becoming rich.

Until a few years ago, a retiree’s debate about when to draw Social Security revolved around age – usually 62 or “full retirement age”, somewhere between 65 and 67, or sometimes later if he didn’t need the money. However, Social Security rules are very complex, and someone discovered that there are all sorts of strategic possibilities for filing, including filing to collect a divorced spouse’s benefit, or a widow’s benefit, or even the “file and suspend” category which has one spouse collecting first on the other spouse’s benefit, then switching to her own. In short, there’s now a cottage industry formed around maximizing Social Security benefit payments.

If you thought this was something you could do yourself, put that out of your mind. You can’t possibly know all the rules. Did you know, for instance, that if you collect on your spouse’s benefit, and you are less than full retirement age, your spousal benefit will be reduced but may still exceed what you would get otherwise? And here’s a nifty trick. If you file and suspend at your full retirement age, and you still have young children in the house, your child can be entitled to half your benefit until their age 18!

We have reviewed multiple websites with information on filing strategies – some of which is incorrect.  By far the best way to handle your own situation is to make an appointment with your local Social Security Administration office with your spouse in attendance if applicable, and let them tell you how to handle filing. Their database can provide numbers that you might need for this exercise and otherwise cannot obtain, such as a deceased spouse’s benefit. You may find that with little effort you can have your cake and eat it too.

Last year’s US stock market was the definition of robust. Volatility was on the low side, and returns were high. Daily price movements were minor when the market sank, but high when the market rose. The S&P 500 corrected about 5.7% from mid May to late June – a decline that was markedly milder than the usual annual correction – only to surge to a new all time high less than two weeks later. Rarely is the stock market so satisfying.

This year, we are reminded just how rare last year was. In short order stocks are down 5%-7% depending on which index you prefer. Foreign stocks are off more. Volatility is rising: triple digit losses are back in the news and volume is surging.

The underpinning of this decline is uncertainty around the Fed’s gradual withdrawal from the bond market. Coincident with the Fed’s taper, China is showing signs of weakness (see our blog of January 4), emerging markets are having a rough go thanks to currency runs, and even some US data points are looking suspect. The confluence of these events is reminding investors that risk is increasing with the change in monetary policy. When risk increases, prices need to decline. The market is behaving as it should. At some point, prices will reach a level that accounts for the riskiness of the transition from lots of Fed support to less Fed support. That will be a buying opportunity.

On the other hand, interest rates were supposed to rise when the Fed tapered. “Everyone” says so. At least for now, this appears to be wrong. Interest rates are not up, they are down, and substantially, from the beginning of the year. In fact, the 30 year mortgage rate has ticked down, for the first time in months. Could it be that a Fed taper will not cause rates to rise?