10 links to walk you through today’s financial crisis — and make you smarter than 99% of other people

All right, guys. I’ve gotten lots of emails about what’s going on with the economy and bailout, so I thought I’d put together a list of the articles I’ve been reading over the last two weeks. I added my own commentary to them below, plus links to stuff I’ve written that agrees/disagrees with each of the articles. My guess: If you read these links, you’ll understand more about the economy than nearly anyone you meet on the street. (Especially some of the fools I’ve been hearing lately, who are convinced that the U.S. will (1) go bankrupt, (2) start owning every mortgage in the country, and (3) think the entire financial system will be “crashing,” whatever that means.)

* * *1. Ignore the Sensationalist Media
Gawker pulls off one of the finest pieces of reporting on the bailout. When I wrote The Media is Atrociously Bad at Prediction and I’m Sick of It, I highlighted how various business media point make bold predictions, get it completely wrong, and are never held accountable.

In this case, Fortune highlighted AIG as one of “10 Stocks to Buy Now.” When they later apologized, they posted “The Best Stocks for 2008,” which, as Gawker points out, included…Merrill Lynch.

2. Hedge Fund Surprise?
This is like a tuna surprise, only worse: Hedge Funds Are Bracing for Investors to Cash Out. Many people haven’t heard about hedge funds’ redemption clauses, which basically means that fancy investors (e.g., universities, pension funds, and really wealthy people) will be able to withdraw their money today (Tuesday, 9/29/08). If that happens, nobody really knows what the repercussions could be…but they would probably be Very Bad. I’ve previously written about why hedge funds are overrated for investors.

3. We Have Short-Term Memories.
If you think history doesn’t repeat itself, you’re nuts. In fact, 10 years ago this month, Long Term Capital Management, a huge hedge fund, nearly caused a global financial collapse. Yet here we are — with the same words being thrown around. Does anyone really think investment bankers won’t make their same salaries at some point in the future? Or that we won’t gradually move back to huge executive compensation? Still, as I pointed out last week, none of that really matters to the individual investor. What matters is picking the right strategy and sticking to it.

4. What We Can Learn From Warren Buffett
Huge, long Warren Buffett interview. He is the man. Read this. It teaches you so much about long-term investing and admitting what you know — and don’t know. Note: I just ordered this new book on Warren Buffett.

5. Should You Buy More? Sell More? Something???!
“Should I withdraw money from my 401(k)?” After 10 people sent me this link, I knew I had to check it out. In the article, 24-year old Bodie Partsch worries about the economy and contemplates withdrawing money from his retirement account, saying, “I could have the money sitting in a jar on my kitchen counter. It’d be safer than in my 401(k),” he said. BAD MOVE! Here’s a quote from my upcoming book:

Recently, a group called Dimensional Funds studied the performance of the S&P 500 from January 1970 to December 2006, during which time the annualized return of the market was 11.1%. They also noted something amazing: Of those 36 years from 1970 to 1986, if you missed the 25 days when the stock market performed the best, your return would have dropped from 11.1% to 7.6%, a crippling difference.

Now, if only we could know the best investing days ahead of time.

But, of course, you can’t. Trying to time the market is for fools. So you keep investing carefully and methodically, while spending as consciously as possible.

I’ll also add this link from JLP: It looks like Market Turmoil is Scaring Off Young Investors, where he notes:

Isn’t it crazy how we do the exact opposite of what we should be doing? If the stock market was going up, up, UP, people would be jumping in left and right—essentially buying over-priced stocks. Now that the market is on a downswing, people are sitting on the sidelines.

6. Cool Data Visualizations of The Economy
The New York Times does extraordinary data visualizations to give you a fresh perspective on the news. Check out What Your Global Neighbors Are Buying and A Year of Heavy Losses. From the first one:

How people spend their discretionary income – the cash that goes to clothing, electronics, recreation, household goods, alcohol – depends a lot on where they live. People in Greece spend almost 13 times more money on clothing as they do on electronics. People living in Japan spend more on recreation than they do on clothing, electronics and household goods combined. Americans spend a lot of money on everything.

7. Q&A: What’s Actually Going On With the Bailout?
If you don’t understand exactly what’s going on, that’s because nobody does. But there are some excellent overviews of the financial situation floating around. I like this one by Suze Orman, where she tells people the following:

• What to do with $100,000 in debt and a $39k/year job.
• The huge mistake first-time homebuyers make. (Hint: A $1,500 rent is not the same as a $1,500 mortgage.)
• What to do when your mutual fund’s account value drops from $120,000 to $88,000.
• Should you stick with stock funds in this tumultuous environment?
• How to buy a car (I disagree with her on this one).

I also like this overview by NY Times Columnist David Leonhardt. If you like audio, check out this excellent program from This American Life. Finally, last week I linked to this excellent explanation of the market crisis on the Freakonomics blog.

8. What Gmail Has To Do With Your Money
I’ve been thinking about this post on a tech blog recently. It shows the early sketches/designs of Gmail, and what you realize from looking at them is that we only see the finished result — not the sausage-making in the back room. The same is true of rich people: We hear about people going on $50,000 honeymoons or driving brand-new Mercedes, but we don’t see the hard work behind it. This is an important concept that’s being more revealed with today’s economy: Many of the people who drove the expensive cars and bought the expensive houses couldn’t afford it. The people who were quietly accumulating wealth will do much better. Read more about this in one of my favorite personal-finance books, The Millionaire Next Door. (Btw, if you haven’t bought a couple good finance books recently — or anything that will help you turn your income into more money so you can hit your goals — please read this.)

9. Don’t Let Your Friends Be Morons
Don’t let your friends be idiots. If you read this site, chances are you understand that having 20, 30, or 40 years before you need your money gives you plenty of flexibility to invest for the long term, even with major or minor dips in the market. Yet with these terrifying headlines every day, it’s like people have become blind, yet highly literate zombies who wander aimlessly from one newspaper to another. Being dumb is not just focusing on the wrong things, it’s making poor financial decisions and then throwing up your hands and wondering why you don’t have enough money a few years later. If you own only one stock — especially if it’s your employer’s stock — then you are a fool. If you are going to buy a $1 million house with no research because you think it’s a good investment, you are a fool. If you don’t realize that your expensive, worthless mutual fund is costing you tens of thousands of dollars over your lifetime, you are a fool. Worry about the things you can control, not the headlines.

10. Get More Reading Material
Want more links? I keep my delicious bookmarks up to date every day, especially the section on finance.

* * *I hope this helped. I’m thinking of doing a live video/webchat next week. What do you think? Would you attend?