May 2005 find you happy and healthy, and may there be Peace on Earth.
One thing a lot of people do at this time of year is review their financial situation. As you know, this is not a joyous thing for many people. Way, way back, I wrote a little piece on Investing. Not only do I have a lot more readers now, but it bears repeating anyway.
Investing (n.) spending money with the reasonable expectation of receiving more money in return at a later date.
Please notice, there has to be money spent, and it has to be reasonable to get more money back. Thus, neither lotto tickets nor insurance are investments. If someone comes to your house to talk to you about investments and starts talking about life insurance, throw them out; you have to die to collect.
The other thing to remember about investments is that you are falling behind if your return is less than the interest you are paying on your debts. It’s one thing to say real estate is an investment with 6.34% average annual return since 1968 and 10% in 2004 when the interest rate on a standard 20 year mortgage is 5 7/8%. If, however, interest rates continue to slowly rise — as economists expect — this may no longer be obvious. I do not include the mortgage deduction when figuring this because a deduction is not money you receive, but rather a discount on the taxes for money you have already spent.
Using similar logic, you should really look closely at the brokerage statement if you have returns of 9.3% (assuming you matched the S&P 500) and are paying more than that on your credit card balances. This is a big, common problem, and if you can get rid of some debt, that is better than having underperforming “investments.”
In closing, I bring you the 25 Dumbest Quote of 2004, a thoroughly bipartisan list including President Bush, John Kerry, and even pop star Jessica Simpson. Or, this account of the Christmas Tsunami and the scientists who didn’t know who to call from the New York Times. I must say, it reads better than the script to last spring’s awful made-for-tv movie, “10.5.” Finally, the BBC tells us about something that might actually be evidence of climate change near the arctic circle, if not global warming.