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Personal Finance Mistakes- Watch and Learn

20 Apr

When the markets crashed in 2008 it changed a lot of people’s lives. For most, money was tight. People that were once making $100,000 a year selling luxury items were now cleaning toilets at their local McDonalds. At that point a paradigm shift started to occur in our society, and families everywhere started to pull their purse strings closed. They needed to re-evaluate their personal finances and save money. Unfortunately for them, they didn’t know anything about personal finances or being frugal. The door was left wide open for them to make mistakes when they thought they were making sound financial decisions. Luckily for us, we can use their mistakes as examples so we don’t have to make them ourselves.

Mistake 1: Using coupons they didn’t need- When the recession started to occur it became apparent that most of us needed to save money. Companies also saw this so they flooded us with coupons. It became so big that we even have TV shows about (extreme) couponing. Using a coupon is wonderful if it’s used to purchase something you really need. One dollar off a loaf of bread, I’ll take it!  The problem occurs when we use coupons to purchase items that we don’t need. Spending $10 dollars on a 30 pound bag of pop rocks might sounds like a great deal, but what the heck are you going to do with a mountain of pop rocks? That example’s ridiculous, but it happens to me all the time. I’ll think about buying something because I have a coupon even though I don’t really need it. Just because I’m getting a good deal for that product doesn’t mean it’s helping my checkbook!

Mistake 2: Making decisions based on emotions- We can all get emotional when it comes to our finances, and that’s why it’s important to keep an open mind. When the economy was collapsing everyone was trying to protect themselves in any way they could. People were selling all their investments and personal belongings. Others were taking money out of their retirement funds to try and save belongings they really couldn’t afford. Whichever way they were going, a lot of those decisions were rushed. Since 2008 I’ve talked to quite a few people that made rushed decisions and almost all of them regret their actions. Take the investments for example; a lot of them would have rebounded to where they were in 2007, but when people sold them on a whim they sealed their fate of a net loss. I know hindsight is 20/20, but I remember wishing I had money to invest when the markets were crashing. I would have bought B of A. If only…

Mistake 3: Not discussing financial goals- As I mentioned above, after the financial collapse families started to cut back on their spending. From what I’ve seen, most families have one person that deals with most of their finances. That can be a very effective method for money management. If someone is more knowledgeable in personal finance it’s good to let them take the reins. The problem occurs when this person leads their family in a direction that everyone hasn’t agreed on. Having common financial goals is the key to household success, and if you never take the time to set-up these goals you’ll run into trouble. Say, hypothetically, I thought it was important to save money for a family vacation. I mean this whole recession talk has really got me down, and I just want to lie on a beach sipping margaritas. My girlfriend, on the other hand, thinks it’s really important to save money so she can be a stay at home mom. To her, nothing’s more important than spending time with our future children. If I’m the one in charge of our checkbook, but I don’t have a clear understanding of what we both want, I am more likely to take our family in the wrong direction. Once she figures out what’s going on (they always do) we will have major issues. This was a silly example, but when you plug vacation in with keeping your house and trade staying home with the children with paying off student loans it becomes very serious.

 I think most of us read blogs so we can learn a thing or two. The mistakes above were just a few things I’ve noticed since the financial turmoil in 2008. Please share any mistakes you’ve noticed people making since then. If we can all share our observations we might actually be able to help someone!

        

   

 
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Posted by on April 20, 2012 in Uncategorized

 

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Long Term Investment- Why Are Facebook Shares Doomed?

05 Apr

It’s rare that I talk about individual stocks on here. I try and stay away from this because I’m a firm believer that it’s more important to have a good investing strategy than having a good stock pick (since no one really knows if it will actually be successful or not). That being said, I have two reasons I don`t think Facebook should be part of your portfolio.

 1) They might not be around in 5-10 years.

 2) If they are around, they will be too big to function successfully.

Some of you might think I’m crazy to say that Facebook won’t be around in 5-10 years. What I mean is they won’t have the gigantic presence they have now. Facebook is a household name, but I can remember when Myspace was a household name. I never dreamed they would disappear, but they did. I’m currently taking a social media marketing class (inbound marketing, personal branding), and we get to talk to experts in social media from all over the USA. Most of them agree that the social media industry is changing fast. They either said Facebook won’t be around in the not so far future, or they won’t be as influential as they are now. Either way, it makes Facebook a bad long term investment.

Jump forward 10 years, do you see Facebook? If you do, here’s what you’ll see. They will most likely be a carnivorous machine that buys up new start-up companies to expand their market/services. Ok, move back to present times. Their growth has already started to slow down. New competition is popping up every day. It’s inevitable that they will start acquiring other companies. As they grow into new markets/services, they will become less efficient. We always hear the saying too big to fail, but I think it’s too big to function. The buzz around the Facebook name will eventually disappear, and their inflated stock price will fall flat. I don’t think this scenario is far-fetched. It’s happened to many companies in the past (Bank of America is a good example). More and more people/companies are starting to see the power in social media, but as that power grows the major players will change.

I have little doubt that their stock will do well at first. Speculation will drive the price up. The richest 1% will make a killing. Heck, maybe even a few of us could make a quick buck if we get lucky, but we should be thinking about the long haul. There is a fine line between a quick buck and a big loss. Am I completely insane? How do you feel about the future of Facebook?

 
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Posted by on April 5, 2012 in Uncategorized

 

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3 Things to Watch to Make Sure You Aren’t Being Overcharged

16 Mar

I think it’s safe to say that we live in a society where everything moves very fast. Most of us are busy, and life just seems to fly by. I think it’s great how much stuff we can get done at any given time, but it’s important to slow it down sometimes to make sure we aren’t being taken advantage of. Here are 3 instances I think it’s important to take a step back and make sure you aren’t being overcharged.

 1) Grocery Store Reciept– I don’t know about you, but I hate grocery shopping. I’m a poor college student so I tend to shop at Wal-Mart (it’s so cheap). Wal-Mart alone is probably why I hate shopping. It’s always so crowded, which make it impossible to navigate the isles! People are always walking around slow. They stand side by side and block the shelves. It’s just a giant mess. Because I hate it there, I’m always in a hurry to checkout. They don’t really use baggage people so I’m always busy packing up my own groceries. I’m sure there have been times where I’ve been overcharged because I wasn’t paying attention. It wouldn’t surprise me if they didn’t have baggage people just to distract their customers from noticing items being rung up twice or with the wrong amount. This is why it’s important to put the rushing attitude behind at the checkout stand and make sure you’re not overpaying.

 2) Monthly Bills– I’ve always been terrible at combing through my monthly bills. I like to just pay them and get it over with. Recently I’ve been hearing a lot about companies tacking on extra fees. It feels like most companies want to hold you upside down and shake every last penny free. Their like bullies stealing lunch money. Most of us probably have no idea if we’ve ever actually paid these extra fees, but in these tough times it’s important to pay attention and end the shakedowns. If we keep paying the fees, they’ll keep adding them.

3) Foreign Travel– My girlfriend’s parents recently got back from a cruise that went to Komodo Island. Tourist from all over the world travel to this island to see the endangered Komodo dragon. Before the cruise ship company would let them off the boat, they made sure they booked a tour with the local Komodo dragon tour company (they are a monopoly). The tour cost over $175.00 a person. If they didn’t book a tour with them they wouldn’t let them on the island. My girlfriend’s father is a very thrifty guy, and he read ahead of time that he could get a private tour of Komodo Island by going to the ranger station and paying $15.00. When he tried to do this the local tour company through a fit. It took a while to work out, but they ended up getting a great tour for 10% of the cost. This example shows how important it is to be informed when you travel to another country. He did his research and was able to get a great deal, and if he would have just gone on with everyone else he would have been overcharged.

 
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Posted by on March 16, 2012 in Uncategorized

 

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Penny Stocks? That’s the Best You’ve Got?

08 Mar

I just don’t get it. When I logged on to my computer this morning I opened up my browser and the first thing I see is “How thousands of people are making Fast Money in the stock market.” I wanted a good laugh so I opened the link. The article that opened was titled Penny Stocks Can Mean Huge Returns – If You Know The Right Ones To Buy. When I was 15 I would have loved this article. Now that I’m a little older, a little more educated, it just makes me mad. Here we are in the middle of horrific financial times: we are losing homes, we can’t retire when we plan on it, and we still can’t find jobs (or we took a huge pay cut). At this point in time we can use all the help we can get when it comes to investing, but instead of assisting us by showcasing valuable information they feed us crap!
I think the title says it all. Penny Stocks Can Mean Huge Returns – If You Know The Right Ones To Buy. ANY stocks can mean huge returns if you know the right ones to buy. Heck, I can play the lottery and get colossal returns if I know the right numbers to pick! I love the example they used in the article to help sell their idea. “Now imagine if you bought 20,000 shares of a penny stock at half a cent a share (which would cost you $100), and it goes to a dollar next week…” To that I say “Now Imagine if you bought 20,000 shares of a penny stock at half a cent a share (which would cost you $100), and it stays like that for years so your $100 is tied up. Meanwhile, you lose your job and can’t afford to eat. You try to sell your shares to get that $100 back, but the bid/ask spread is so far apart you end up only getting $20 back!” You might think both scenarios are unlikely, but I think the second is a lot more likely than the first.
Just in case you didn’t know, the bid/ask spread is the difference in price between what someone is willing to buy the stock for and what someone is willing to sell the stock for. It doesn’t play a big role with most normal stocks, but it plays a huge role in penny stocks. If you have a stock that is said to be worth $.01 but people are only willing to pay $.005 for it, you can’t sell it unless you take the lower offer. It works the other way around for buying penny stocks.
With our current economic condition it’s more important than ever for us to be careful with our personal finances. We all want a miracle, but penny stocks aren’t the answer. If it was that easy, everyone would be doing it. It may seem like $100 isn’t that much money. It might be worth the risk to make “fast money”, but if we thought like that all the time we’d be broke. If I haven’t changed your mind about penny stocks do a few things before you invest in them: 1) Look up a few, 2) Check their bid/ask spread (you can use yahoo finance), and 3) Watch them for a while. If you’re still into it, go for the gold.

 
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Posted by on March 8, 2012 in Uncategorized

 

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Stocks- No Such Thing as Overvalued

02 Mar

With all these tech companies going public (LinkedIn, Pandora, Yelp ect.) I’ve been hearing the term “overvalued” a lot lately, but what does that term really mean? When someone says a stock is overvalued it’s important to keep in mind it’s just a matter of opinion. People say beauty is in the eye of the beholder. I would say value is in the eye of the beholder.  If you’ve ever watched the TV show Pawn Stars you’ll see continuous examples of this. A customer goes to the pawn shop to sell their grandmother’s shoelaces that are supposedly worth $1000. When Chum (a character from Pawn Stars) only offers them $5 they get offended and leave. The customer is mad because Chum thinks the shoelaces are overvalued at $1000. The thing to keep in mind is Chum has no idea how much the shoelaces will actually sell for. An item’s value is different for everyone.  This is why valuation is one of the hardest subjects to master.

How do we figure out the price on something if its value is different for everyone? Well, generally we go off its market value. It makes sense to me that market value is equal to the intrinsic value (real value plus outlying factors). An example of this is Yelp’s IPO. The real values of Yelp’s shares were evaluated at $15/share, but as soon as the markets opened the price shot up over 60% and closed at $24.58! This happened because the real value ($15) met with the outlying factors ($9.58) to create the market value ($24.58). I think it’s overpriced, considering they have never posted a profit, but just because I don’t see the value of the outlying factors doesn’t mean they aren’t there. That’s why I hate when people give specific stock picks. They have no clue what a stock is actually going to do. That’s why I think it’s better for people to use their own gut instincts when it comes to buying individual stocks. You might be in tune with some outlying factors that others aren’t.

If someone says a company is overvalued it means that they don’t see what the rest of the market see at that point in time. The real value and the value of the outlying factors are continuously changing. This means the stock’s intrinsic value  is always shifting. There is no way of actually knowing if a stock is overvalued, because it’s impossible know the future of its intrinsic value. There are so many outlying factors at work it’s incomprehensible to know them all. The only way you can even get close to knowing is if you are completely in tune with not only the company, but people’s perception of the company and their products. Anything short of that is pure speculation.

That being said, does anyone else feel like speculation is all we have left when it comes to investing in individual stocks?

 
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Posted by on March 2, 2012 in Uncategorized

 

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Sex Ratios & Men’s Finances- I Bet You Didn’t Know This

26 Feb

An academic study came out suggesting that men are less responsible with their finances when they live in an area with a male biased sex ratio (more men than women). The article is called The Financial Consequences of Too Many Men: Sex Ratio Effects on Saving, Borrowing, and Spending (from the journal of Personality & Social Psychology January 2012).  What the article comes down to is men spend more money when women are scarce. Now I’m sure the ladies love hearing stuff like this because it makes them feel special, and in all honesty it should. It shows that we need you, and are willing to go through extraordinary measures to get you.

When I first started reading this article I didn’t buy it. I always seemed to me that I spend way more money having a girlfriend then I would if I didn’t. All the dinners for two,  the vacations for two, and even filling up two gas tanks. No, this article had to be wrong. If men spend more money when women aren’t around then what are they spending it on?

As I read further, the picture began to fill itself in. Every man wants a woman. When there are more men than women it makes matching of partners impossible. Every man wants a woman, but they all can’t have one. So what do we as men do? Well, thousands of years ago we probably would have ran around beating our chests and killing each other to find out who’s the strongest. Since we can’t do that anymore (and women have more say in the matter), we go out and spend money to try and lure women into choosing us.

As it turns out, the more male biased the sex ratio, the more money women are expecting men to spend on them. If you can’t take them to a nice dinner and buy them expensive gifts they will find someone who can (I realize not all women are like this). So to prevent that from happening what do we do? We take on debt. So not only are we spending more but we also have more debt, and with more debt comes less savings; However, when the tides have turned (and there are more women than men), men spend less on their women.

I think this article is interesting because it shows us that there are underlying issues that affect our finances that we might not even think about. They use an example of two cities that are located close together, but their finances are completely different. The city that has more debt is the one with a male biased sex ratio. It’s an issue most of us would never have even thought about, but it seems like it could have a substantial impact. That’s why the study of psychology, sociology, and finance mixed together is so great. Have any of you heard about other psychological/sociological issues affect finances (I’m always looking for some good reading materials)?

 
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Posted by on February 26, 2012 in Uncategorized

 

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When It Comes To Saving, It’s Always Better Late Than Never

21 Feb

There are tons of things in life that we know we need to do, but we never get around to it. It’s not that we don’t plan on completing these tasks, they just live on to be done another day.  For example, this blog post was supposed to be done on Monday, but here I am on Tuesday finishing it up. I might lose some points on my homework assignment, but sometimes when life gets crazy you  have to re-asses your situation. Luckily the cost of changing plans for something as little as a homework assignment isn’t too steep, however, I cannot say the same thing about the process of saving for retirement.

Everyone will tell you one of the most important things about a retirement plan is starting while you’re young. I completely agree that that would likely be a huge help. However, there are millions of people over the age of 45 with no savings at all. Now if you are one of those people, what are you to do?  I mean, no one wants to work for the rest of their lives (and that’s if they are fortunate enough to be able to). No one knows how long social security will be around for, and who can live off of that alone anyways? After thinking about these questions, no easy answer occurred to me. They are hard questions with hard answers. The only idea that really came to mind is: start saving right away!

I come from a family that has never been good at saving money so I understand how people get in these situations. There are multiple reasons/emotions that explain why someone would wait so long to start saving for retirement. They might have had other issues that seemed more important at the time, or maybe it’s as simple as they don’t know how to start. Whatever the reason may be, it’s important to remember that when it comes to saving, it’s ALWAYS better late than never. You might have feelings of discouragement now, but after you get started, you’ll feel so much better (just like I do now that my homework is almost done). Even if you start out small, that’s better than nothing. Then, opportunities might present themselves where you can save more and more. No matter how it turns out, I can promise you that you’ll be better off than you were before. And that’s all any of us really want, to be a little bit better, to live a little happier, and of course, to have a little more money in our savings accounts.

But seriously, if you want some good tips for retirement savings click this link and read a helpful article from moneyeconomics.com.

 
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Posted by on February 21, 2012 in Uncategorized

 

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Stock Market Investing- 4 Mistakes I’ve Made So You Don’t Have To

17 Feb

I started getting interested in stocks at the tender age of 15. Like most investment beginners, I had dreams of striking it rich. I mean how hard could it be?  I came up with all sorts of schemes that, at the time, seemed like great ideas. There was no way they could go wrong. I was 15 after all. I knew everything. It was tough when I realized that, most the time, the stock market isn’t a get rich quick kind of place, and I’m hoping my folly can save you money.

1)      Don’t Buy A Stock Just Because It Splits:

A stock split usually occurs when a company thinks their stock price “looks” too expensive (which would prevent investors from buying it). There are all different kinds of stock splits, but the easiest to understand is a 1 to 2 split. When I was 17, EBay announced they were going to do a 1 to 2 stock split. Their stock price went from (around) $80 a share to $40 a share. No value was gained or lost because the number of EBay shares available doubled ($80*1 share= $80 and $40*2 share= $80). To me, as a new investor, I thought this was the deal of the century. I mean the stock price HAD to go back up to $80.00 a share.  Unfortunately, I didn’t understand that rarely happens and lost money.

 

2)      Not all IPOs (Initial Public Offerings) Are A Good Buy:

An IPO is stock that will be available to buy for the first time on the stock market. When I first started investing I was obsessed with them. I thought that it was a good opportunity to make money quick. The reality is IPOs are very uncertain. They are prone to sharp spikes and drops as the market tries to figure out their true value. It is possible to make money with IPOs, like my Google examples from my first blog post, but more often than not it’s best to stay away from them when you’re first starting out.  My advice is if you really want to buy an IPO wait a few months for it to find its feet. If you really believe in the company a few months of waiting won’t kill you.

3)      Don’t Become a Day Trader With A Small Stack Of Cash:

A day trader is someone who is willing to hold stocks for a very short amount of time. They constantly buy and sell all day long just to try and make a little profit. The idea of day trading seemed exciting to me. Trading stocks all day long would be exciting, and I wouldn’t have to be patient and wait for the stock price to go up.  It would be easy money, and I wanted easy money. The problem with day trading is it’s for people that have a lot of money. They don’t have to worry about the trading fees because it’s nothing compared to the investment they are involved in. I found myself losing money even when a stock’s value would go up because of the trading fees. It’s important to understand that if you’re getting involved in the stock market with a small amount of money ($1,000 or less per company), the fees can eat you alive.

4)      Penny Stocks Suck:

The fantasy of buying a stock for $0.01 a share and selling it for $10 a share is very appealing to investors. Who wouldn’t want to get rich over night?  The thing to keep in mind is that there is a reason that the stock is so cheap. The amount of risk you take by buying a penny stock (which the SEC defines as a stock trading under $5 a share) normally outweighs the reward. A friend of my parents talked them into buying a cell phone company’s penny stock. He sold them on the idea of a green cell phone. How could that idea not take off?  In just a few months they were going to be like Richie Rich! That was two years ago. They bought the stock for $0.05 a share and today it’s worth $0.01 a share. I did some digging and realized people have been talking this particular stock up for years but it has never moved very far. They failed to realize that the stock market is just like everything else, and if something seems too good to be true it normally is.

 
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Posted by on February 17, 2012 in Uncategorized

 

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Buy High, Sell Low… Wait That’s Not Right

12 Feb

I’m going to use my blog as a tool to help people understand personal finance. After studying finance in college I realized that it’s an out-dated science. There are some old concepts that work, but there are even more concepts that need to be revamped. This blog will be used in a manner that will help educate readers on the basics of personal finance, while looking at investing techniques to accomplish financial success.

Everyone has heard the term buy low and sell high. It’s interesting to me how everyone knows this general concept, but events like the real estate bubble still occur. This morning I was reading an article called Stock Market Psychology- Why We Buy High & Sell Low by Shibashake. In this article I think they nailed the psychology behind bad investing. I’m going to go over one aspect of the article now; however, I would recommend reading the whole thing.

When you’re young it’s common to make a mistake and then blame it on friend. Your parents might have said “If your friend jumped off a bridge does that mean you should do it too?” According to the idea of social proof, you probably would. Social proof is the idea that if people around you are doing something, you’re likely to rush in and do it too. This relates to investing because sudden high volumes of demand on a stock will inflate the price. This means that you’re more likely to buy this stock even if it’s overvalued. The article makes this seem like a bad thing, but I have a different take on the matter. When I was a teenager Google announced its IPO ($100 a share). I really wanted to buy some, but my dad talked me out of it. As time went on, Google’s share price kept climbing and climbing. I knew I made a mistake not following my gut. My father wanted to save me from social proof, but if you’re able to get on the bandwagon early it isn’t always a bad idea. In fact, it can be a great way to gain big profits. The ideas to keep in mind are that it’s important to protect yourself and understand what you’re doing. If you’re going to take a calculated risk, make sure you set up a sell-stop order. This will prevent you from losing too much money.  You set the sell-stop price, and if the price falls below the set amount it will automatically be sold.

If you decided that you would rather try to avoid social proofing all together (which is what I would recommend to beginners), the article has one ingenious way to get around it: THINK BEFORE YOU ACT! It seems so simple, but we all know how easy it is to rush into a decision. The article suggests coming up with an investment strategy to prevent this. I agree that this is the easiest way to gauge if your investment is well thought out, but I also know that many people won’t want to take the time to do this. My suggestion to those people is to set up a time frame that you give yourself to think about the investment. Unless you’re a big player, a solid investment won’t require a split second decision. Once the time frame is up, go ahead and make your move.

 
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Posted by on February 12, 2012 in Uncategorized

 

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