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

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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.

fortunebeststocks.jpg
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?

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65 Comments

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  1. [...] la mayor caída en puntos de la historia. Veremos que pasa a lo largo del día. Por cierto del blog I Teach to be Reach encuentro un post con unos enlaces-consejos [...]

  2. Hi Ramit,
    Great post and great comments. Accountability at any level is quite difficult and is probably the reason why we see history repeating itself over and over again.
    When money is involved, it seems that common sense flys out the window and in its place comes a dose of selfishness and greed.
    Will be fascinating to watch how things unfold over the next few months.
    As an Australian looking in at the US, I’m not quite sure when the right time will be for Congress to give up on a bail out and go and campaign to get re elected…

  3. What a great post – I think that holding steady and not selling anything is the way to go. If you read Buffett, Malkiel, Bernstein – they all say the same thing – there are occasional bubbles and crashes and if you can’t predict them then you have to live through them. Cashing out at the bottome or on the way down is the wrong kind of market timing to engage in.

  4. Great post and great advice in this challenging environment. It’s really amazing to see what short-term memories people have in times like these.

    Here’s a great video that helps put things in historical perspective:
    http://www.thorntonwealth.com/is-it-different-this-time-2/

    Too bad the mainstream media and financial press perpetuate a lot of this madness.

  5. A nice roundup of the bailout to date. Juicy material for a number of finance blogs (including mine) and there is still a long way to go.

  6. And for what has caused this economic crisis, see this video:

    http://www.youtube.com/watch?v=NU6fuFrdCJY

  7. [...] 10 links to walk you through today’s financial crisis @ iwillteachyoutoberich.com [...]

  8. Does it not bother you that Buffett thinks the US’s massive deficit/debt is not a problem deserving of too much worry? http://www.pgpf.org/resources.dyn/IOUSA_OmahaTownhall_Transcript.pdf

  9. [...] you smarter than 99% of other people Posted on September 30, 2008 by katbur Really great post with explanations about what is going on with the economy, bailout, market etc. There are tons of [...]

  10. You’re ignoring the obvious.

    Too much leverage = the devil.

    Cash = the king (still, but you knew that).

  11. At the moment, I don’t care so much about whether the bill was or wasn’t passed.

    What’s most disappointing to me is that the House wasn’t able to develop a bill that would (a) fix the problems and (b) also pass the House.

    That failure to find a *successful plan* on *common ground* is an indictment of our representatives’ leadership and collaboration skills. With leaders like this, it’s no wonder that our economy is going to pot.

  12. [...] 30, 2008 in Uncategorized | Tags: economics, finance, warren buffett I found this article and associated links to be very helpful when it came to understanding the myriad twists and [...]

  13. According to your argument, I should not believe you either.

  14. You should believe more than 70 years of returns more than any journalist or blogger. I just happen to fall on the side of history that suggests the economy will continue to grow over the long term — as it has — not the side that uses handwavy arguments involving the gold standard, undefined “crisis,” and tin cans of coffee.

  15. Ramit, THAT has got to be the most common sense, yet funny response I’ve ever read!! LOL!

  16. [...] over at I Will Teach You To Be Rich, has done a really nice job putting together a list of links to help people better understand the financial crisis. He was even so kind as to include this post from last [...]

  17. I hope more people would read this. It’s very basic financial intelligence, but it seems many don’t know it. Why don’t they teach this basic knowledge in school? They make kids learn about ancient french wars and linear algebra, but not the basics for financial stability. seems quite wacky to me.

    thanks!

  18. Great collection! It’s been hard to intake everything that’s been happening. You just made it easier.

  19. Thank you, thank you thank you for the time you spent putting this together. Much appreciated.

  20. We’re still investing in our index funds. Getting more shares for our money is great. We have awhile before retirement. It’s basically business as usual right now. If anything, we’re pushing to eliminate the high interest debt, we have $1300 left and hope to finish it off this year.

  21. This was a great post! There is so much turbulence in the market today, and people need peace of mind more than ever. I wanted to offer your readers a link to another blogger who is doing great work. He writes about our ‘childhood money messages’ and how the best approach to stability in today’s market is to resist letting these emotions control our buying/selling habits. It is really fascinating work, and something you should all check out. His name is Spencer Sherman, and you can view his blog at http://www.curemoneymadness.com/blog.

  22. [...] I have been in a total panic and blissfully ignorant somehow all at the same time. Well someone has laid it out with links so that even I can understand what is going on. The bottom line? Stay calm. [...]

  23. I keep wondering: is now a good time to invest more than normal if I have the funds to, since stock prices are so low?

    It seems to me like putting money in an index fund right now, even if you haven’t invested before, would be a good idea if you can afford it. I just want a straight answer from someone to make sure I’m not a complete idiot. :)

  24. Ramit,

    Great collection of links. You even get angry effectively. You use your frustration about people trying to time the market or pulling their money out to drive some solid points home. It comes off the page in a very positive way!

  25. Having your money in the markets during these times can be frightening. Like Ramit said – it’s easy to get scared with all of these doom and gloom headlines. Investing doesn’t need to be like this. Here are some basic tips I give on my blog to help others learn to invest.

    1 – Use ETFs as your primary investment driver, since they have low fees and costs, are easy to get in and out, and come in a wide variety of choices.
    2 – You can diversify your portfolio with as little as 3 to 4 ETFs
    3 – Always use a stop program
    4 – Know when to get into and get out of the markets by using volatility and other technical indicators

    Investing doesn’t have to be hard, complicated or frightening. You just need to develop an investment plan that covers these points.

    Learn to invest smarter than the rest … Lee from http://www.cheaplee.com

  26. I’ve been thinking the same thing as Josh…I’ve got some money sitting in an ING account, and I’m wondering if now is a good time to invest it in an index fund. On the one hand, I’d like to think the market’s going to rebound…but on the other hand, this volatility also means that job security is at a low point. Would I be better served to invest or save in case my company is forced to lay off (or have an unexpected large cost to cover)?

  27. Joe & Josh

    No one can predict the bottom or top of a market. So, looking for a quick gain on a recovery is pretty dicey. The market may go nowhere for years or may rebound soon.

    I have increased my monthly 401K contributions because if the market is stagnant then I needed to contribute more to reach my goals. If the market rebounds soon, great! I will be ahead. I shouldn’t need the money for another 30 years and I can’t imagine a bear market lasting THAT long… for that we would need some far, far worse problems. At that stage I would be far more concerned with basic survival rather than how my portfolio was doing.

    I’m not raiding all of my savings- since some cash is a good thing to help handle the unexpected. Although, I wouldn’t keep too much in cash long term either as inflation will eat it up. I will likely trim down savings a bit but I’m mostly trying to cover the increased investments through reducing my expenses.

    -Rick Francis

  28. I find the “Great Post! Read my/this guy’s blog” comments pretty funny. Shameless. As for the post, good stuff, especially the Warren Buffett interview. I love that guy (also getting his book, should be a great read).

  29. [...] 10 links to walk you through today’s financial crisis — and make you smarter than 99% of other p… (tags: investing history lifehacks politics quotes money meltdown) [...]

  30. [...] dilbert strangely relevant The Dark Bailout [VID] » 50 Rules To Being A Gentleman – KING-mag.com 10 links to walk you through today’s financial crisis — and make you smarter than 99% of o… 6 PCs, 1 Case – Custom Wall Mounted Renderfarm w/[PICS] Beware of The Orbs! Never has a ball seemed [...]

  31. Excellent.

  32. What a great article! I agree with many of the facts you’ve drawn upon and your analysis against them.

    I recently wrote an article on this topic too called “Times Are Rough, So Think Smart And Profit” at http://www.kevinelliott.net/blog/2008/09/26/times-are-rough-so-think-smart-and-profit/ — I think you’re much more thorough than I was, and I actually really appreciate it very much. I prefer the depth you have.

    Stop by and say hello if you have an opportunity. Always looking to network with likeminded individuals like yourself.

    -Kevin

  33. Apparently my comment encouraged more self promotion…

  34. [...] A great read covering what is going on with the markets is 10 links to walk you through today’s financial crisis — and make you smarter than 99% of other p…. [...]

  35. Carlin, I don’t see anything wrong with a little self-promotion, if it’s _relevant_ to the topic. I encourage you to do the same on my site, assuming it’s relevant of course! The author of this article has every right to remove my comment if it violates his own policies or beliefs. In any case, I truly believe that Ramit’s article provided more concrete evidence and I wanted to let him know that.

  36. Do the webchat!

  37. [...] 10 Links To Walk You Through Today’s Financial Crisis – Ramit at I Will Teach You To Be Rich has a fantastic group of links to get you through your day. I enjoyed this post very much, but was upset to see one of the links where Ramit tried to justify his purchase of a brand new car as being the best financial decision, and then he advocated that people take out loans to purchase their cars. He is not teaching anyone to be rich with that example. [...]

  38. [...] you need to read this article by Ramit Sethi on I’ll Teach You to Be Rich, in it he links you to ten of the best articles he has read that explain what is going on in the [...]

  39. [...] 10 links to walk you through the financial crisis (via Consumerist) 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. [...]

  40. Go, Ramit!
    Don’t Let Your Friends _and Family_ Be Morons

  41. You keep tempting us with quotes from your book. Please hurry up. I am already sold!

  42. great great stuff that i will definitely use in the near term!

    http://jwojdylo.wordpress.com

  43. [...] 02nd, 2008 | Author: admin Ramit Sethi at the I Will Teach You to Be Rich blog offers up 10 links intended to explain and detail how the economy got into this crisis, what average investors should [...]

  44. [...] @ 8:17 am | Author: admin Ramit Sethi at the I Will Teach You to Be Rich blog offers up 10 links intended to explain and detail how the economy got into this crisis, what average investors should [...]

  45. [...] One of the few people I listen to on financial matters, Ramit Sethi, has produced a great list of 10 links to walk you through today’s financial crisis — and make you smarter than 99% of oth…. [...]

  46. Thanks for putting together this useful list and for keeping us focused on the big picture.

  47. [...] not worry about the current economy, but I Will Teach You To Be Rich has 10 links that can help. (Read it at I Will Teach You To Be [...]

  48. [...] 10 links to walk you through today’s financial crisis [...]

  49. [...] hay que sacar oportunidades a la crisis. Los tips de Ramit Sethi pueden ser útiles antes de que entren en pánico porque todo cae y no para de caer (pero claro, [...]

  50. [...] Pick Ramit presents 10 links to walk you through today’s financial crisis — and make you smarter than 99% of other p… posted at I Will Teach You To Be Rich. Lisa Spinelli presents The Psychology of Money – [...]

  51. [...] presents 10 links to walk you through today’s financial crisis — and make you smarter than 99% of other p… posted at I Will Teach You To Be [...]

  52. Fantastic article and so true.

    If I were to completely shut the media out of my life – i.e. no TV, no Internet and no newspapers – then I would have no clue what is going on in the market. As a result the investments I have would still be going down down down but I wouldn’t care because ignorance is bliss in this case.

    Ok it pays to be informed but at this point in time there is value to be had by sticking your head in the sand – well at least half your head in the sand.

  53. [...] 10 links to walk you through today’s financial crisis; [...]

  54. [...] 10 Links To Walk You Through Today’s Financial Crisis [...]

  55. Thanks, great collection of links!

  56. [...] económico IEco “Diez links para manejarse en la crisis” que no es más que los consejos de Ramit Sethi, un blogger que basa sus posts en análisis para ahorros a 30 o 40 años (y quién le va a reclamar [...]

  57. [...] Smarter than the average bear 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." I Will Teach You To Be Rich [...]

  58. [...] 10 links to walk you through today’s financial crisis; [...]

  59. [...] 10 links to walk you through today’s financial crisis — and make you smarter than 99% of other p… (tags: finance) [...]

  60. [...] 10 links for a better understanding of today’s financial crisis do exactly that [...]