Ben Popken On "To The Point" (And A Debate Over Personal Finance Advice)

Here’s the clip of the To The Point radio program I was on yesterday. There was a bunch of people on, you can hear me at 23:30 talking about the Grocery Shrink Ray and 37:30 talking about the customer service hotline Sprint set up for Consumerist readers. It’s a great show and I love Warren Onley’s voice, but I have some issues with the advice some of the other guests gave on the show that I need to address. Here’s what I would have said had I been asked some of their questions…

How should people invest?
One guest said that you should diversify your portfolio and invest globally. While this is true, here’s something that will actually help you: Get into index funds – Vanguard is a good to get them from – because you will get to keep more money over time instead of losing it to fees. Here’s how most stock pickers and fund managers are ripping you off.

Also, with the global economy being so intertwined, investing globally doesn’t reduce your risk as much as it might have in the past.

One guest recommended putting the same amount of money in the stock market because it is a “tried and tested” method of investing. What he’s talking about is “dollar cost averaging.” The idea is supposed to be that some months the stock is up, and some it’s down, but if you invest the same every month, over time the difference averages out. While investing regularly is great and definitely better than not investing, and trying to time the market can be disastrous, you actually make more money if you buy your stock in one lump sum. Here’s the study.

Are credit card companies going to keep on lending briskly?
Warren asked a guest if credit card companies are going to keep lending money at the same ferocious rate they have been. The guest said yes, because their mailbox was still full of credit card offers. This is flat out wrong. Credit card companies are tightening standards and reducing their exposure. They’re raising interest rates, canceling and freezing people’s home equity lines of credit, and canceling credit cards for long-standing perfect customers.

Secondly, if your mailbox is full of credit card offers, you need to go to optoutprescreen.com and with a few keystrokes you can be unsubscribed from probably about 98% of the lists of companies sending you offers.

Who is to blame for the mortgage meltdown?
“There’s enough blame to go around for everyone,” responded one guest. While this might have made sense, say, back in December, by now it’s pretty apparent that there was much more fraud and deception going on with the mortgage brokers and resellers than from the consumer side. Don’t believe me? Listen to this episode of This American Life while watching this slideshow. If you’re in a rush, just read this insider document of a Chase employee telling other employees how to game the computer system to get loans approved that shouldn’t have been approved.

Comments

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  1. homerjay says:

    *cough* media whore *cough*

    :)

    Look at it this way, you’re getting more press than McCain.

  2. trujunglist says:

    optoutprescreen.com is clearly a bunch of bullshit. I went there a couple of months ago (or whenever I first saw it here) and now I’m getting more credit card offers in a single week than I got in several months without it. Did I do it wrong?

  3. Ben Popken says:

    @homerjay: All our press clips are clearly labeled with the “media whoring” tag.

  4. homerjay says:

    @Ben Popken: Yeah, I know. I just wanted something to lead into my McCain crack. Would you believe I actually put that much thought into this?

    I’m so alone…

  5. snoop-blog says:

    @Ben Popken: And I thought you were joking till I clicked on your link.

  6. timmus says:

    Receiving credit card offers is definitely not a measure of brisk lending. I don’t bite on those, but I know a fair number of people who’ve applied and been declined. It’s nothing more than dangerous presort junk mail.

  7. DeadlySinz says:

    @Ben Popken:

    Why did it sound like you were outta breath lol.
    Jogging while talking ?

  8. Lay off ben. If there’s anyone that should be in the spot-light, it’s him.

  9. readams says:

    Whoa folks: hold on there just a gosh-darned minute!

    The approach that is analyzed for dollar-cost averaging is to take a large sum of money and, throw it into a bank account, and then gradually trickle it into the stock market.

    For most people, this is 100% backwards! You’re faced with the opposite problem. You have a stream of money coming in (your salary), and you want to invest in the stock market. How should you approach this? Should you save it up until you have a big lump sum and then invest it? Or perhaps save it up until the market looks like it’s about to go up? No!

    Invest it _as the money comes in_. Don’t try to time the market. And don’t save up your money and then invest in a big lump. This does in actual fact expose you to greater risk and you’ll get a lower expected return.

  10. Myron says:

    “diversify your portfolio and invest globally” vs “index funds” is a false dichotomy. Asset allocation is the biggest determinate of success. You should implement your allocation using index funds. So you are both right.

  11. ratnerstar says:

    @readams: What he said. Seriously Ben, that’s some very misleading advice you’re giving.

  12. Puck says:

    It’s pretty cool how credit card companies call people who pay their bill in full on time, every time “deadbeats”. What a classy industry it is.

  13. Ben Popken says:

    @Myron: @ratnerstar: Nah. Read “A Note On The Subotimality of Dollar-Cost Averaging As An Investment Policy.” ([gsbwww.uchicago.edu]“>PDF)

    @DeadlySinz: Ha, I know. I had just bit into a chocolate-covered espresso bean when they directed the question at me. Whoopsies.

    @Myron: There’s no dichotomy, I’m just saying the advice is too general.

  14. ratnerstar says:

    @Ben Popken: Here’s the problem, Ben: there are two different things that people mean by “Dollar Cost Averaging.” One of them is a strategy for maximizing returns on an investment of a given amount of money. You’re right; this is inefficient. If you have ten grand to invest, put it in the market now rather than doling it out over time.

    On the other hand, DCA can also refer to a strategy for how to manage periodic investments. This is far and away what most people mean when they talk about it and clearly the definition the other guest on TTP was using. If you have $100 a month to invest, it’s most efficient to make your buys at the same time every month, rather than saving it up and trying to time the market.

  15. DaveStolte says:

    @ Ben: regarding Chase’s Zippy system: it’s important to note that Zippy is simply a preliminary step in the approval process – all loans still go to a live underwriter for final approval. Anything “iffy” would get flagged. Chase has actually been on the financially cautious side through this loan meltdown. It’s a little misleading to lump them in with the likes of Countrywide.

  16. wwviper says:

    [personal.vanguard.com] lists the various index funds and their performance.

    I’m not an expert by any means, but IMO the “safest” may be the “Total Stock Mkt Idx Inv” (VTSMX) and “Total Int’l Stock Index” (VGTSX); split 50/50. I’ve been watching both for a while and since April ’07 they’re down 12% and 8%, respectively. Although, they might go down another 5-10% before it’s a good time to buy in.

  17. JustThatGuy3 says:

    @wwviper:

    Anything with “stock” in the name isn’t going to be the “safest,” if you define “safest” as “least likely to drop.” Stocks have historically had the highest long term returns, but also the highest standard deviation in returns (i.e. make 10% a year over 20 years, but that includes years where you’re up 20% or down 20%).

    If you want funds with the least chance of decline, you’re looking at money market, gov’t bonds, and high-grade corporate securities.

  18. JustThatGuy3 says:

    @Ben Popken:

    Ben, you’re not understanding the note. The note shows that, if you have $15,000 today, you should just go ahead and invest it, rather than doling it out in $1000 chunks over the next 15 months (basically, because (a) the market tends to go up over time, and (b) there’s no reason to believe that each of those $1000 investments will be better timed than today).

    For most investors, however, the situation is “do I invest every month into my 401(k) or save it up in cash and try to time the market?” In this case, the best choice is to invest the $ when you get them, rather than holding the cash and waiting for the “best” chance to get in.

    Dave Swensen (runs Yale’s endowment, and has done spectacularly well – if you look at his performance over the last 20 years vs. his peers, he’s in effect the biggest contributor to Yale in its history, by a wide margin) has been very eloquent about personal investing – he argues convincingly that (a) very few professionals consistently beat the market, and (b) essentially no amateur is going to match the professionals, so buy low-cost index funds, diversify, and spend your time doing something else.