Friday, September 26, 2008

Thursday, 4:23 p.m., CDT

If you’re writing a Financial Tip of the Week, in this economic environment, you want to wait until the last minute to see what, if anything, is going to change. These are dramatic times, or as Charles Dickens wrote in The Tale of Two Cities (1859):

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

The above says it well for how many have felt over our lives. Yet, for most of you, today’s news must seem like a harbinger of doom as you work to manage the resources of your household, while preparing for retirement or college expenses. On the other hand, you may be near your beginning and are actively preparing yourselves for jobs after college or are planning on investing in yourself by attending college. (College education continues to be one of the best investments one can make in one’s self.)

Rather than try to provide you with my thoughts on this week’s events and to avoid talking about another financial topic of interest – many exist but nothing trumps what is going on in Washington and Wall Street – I thought I bring you some bullets of wisdom from the Sage from Omaha, Warren Buffett.

Warren Buffett was interviewed on CNBC news on Wednesday morning about his surprise investment of $5 billion in Goldman Sachs (complete transcript: ). Some bullets, from his comments:

·If I didn't think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week…..government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal. (Editor’s note: As of this afternoon, Congress has supported Paulson’s proposal.)

·Last week we were at the brink of something that would have made anything that's happened in financial history look pale.

·…the economy and the financial markets, but they're so intertwined that what happens, they're joined at the hip. And it doesn't pay to get into horror stories in terms of naming institutions or anything. But I will tell you that the market could not have, in my view, could not have taken another week like what was developing last week. And setting forth the Paulson plan, it was the last thing, I think, that Hank Paulson wanted to do. There's no Plan B for this.

·…it's everybody's problem. Unfortunately, the economy is a little like a bathtub. You can't have cold water in the front and hot water in the back. And what was happening on Wall Street was going to immerse that bathtub very, very quickly in terms of business.

·…a collapse of the kind of institutions that were threatened last week, and their inability to fund, would have caused industry and retail and everything else to grind to something close to a halt.

·…you have all the major institutions in the world trying to deleverage. And we want them to deleverage, but they're trying to deleverage at the same time. Well, if huge institutions are trying to deleverage, you need someone in the world that's willing to leverage up. And there's no one that can leverage up except the United States government (underline added for emphasis). And what they're talking about is leveraging up to the tune of $700 billion to, in effect, offset the deleveraging that's going on through all the financial institutions.

·…if I could buy a hundred billion of these kinds of instruments at today's prices, and borrow a non-recourse $90 billion, which I can't, but if I could do that, I would do that with the expectation of a significant profit. (Editor’s note: This implies that the $700 billion price tag may be substantially reduced as the government oversees the disposition of these distressed assets.)

·But they (the U.S. government) have the ability to borrow. They can borrow much cheaper than I can borrow. They can borrow unlimited. They don't have covenants. They don't have -- I mean, they are in the ideal position…..I will tell you that the buyers of the instruments these days are going to do better than the sellers…..In fact, one thing you might do is, if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion in the market and then have the Treasury match that, for what they pay. You don't want the Treasury to be a patsy.

·But I'll tell you, with Hank Paulson on top of it, you couldn't have any better guy to do that.

I’ll join Mr. Buffett with my hope and prayer for a growing public confidence in the wisdom of our leadership and for an end to the foolishness of recent history. I’m sure many of you join me in a sincere desire to see us learn from this lesson of the markets. In particular, we must remember that ethics and principles have a place and that place is in the forefront of our personal and work decisions - each and every day. If principles guide us, the result will be Financial Success…with an Abundance of Wisdom.

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Friday, September 19, 2008

Freddie, Fannie, and You

What a year! What a week! What a day! Everyone I have spoken with in the finance professions is shocked and awed by the events of the past week. Moreover, they are in various stages of grief or bewilderment as they ponder the future for their clients, as well as themselves. I thought it might be healing (at least for me) to put some thoughts on the screen with regard to what the bailouts mean and what I’m considering to be good advice…

The bailout of Freddie Mac, Fanny Mae, and AIG; as well as the purchase of Merrill Lynch by Bank of America was done, according to Treasury Secretary Paulson, to stabilize financial markets, support mortgage financing, and protect taxpayers. Most of us wonder what is in it for us, as we watch our portfolios shrink as the result of others’ actions. Many also question the government acting in such a way, apparently in contrast to our belief in the free market system. Good medicine sure can taste bad.

First, the Treasury could not let Freddie Mac and Fannie Mae fail. These shareholder-owned companies are actually the creation of the federal government charged with guaranteeing the mortgages issued by private lenders and government agencies. Investors around the world believed these diversified portfolios of mortgage loans to be safe and that the U.S. government guaranteed them, at least that was their perception. These securities were considered to be an almost-as-safe-as-Treasuries investment with a higher return and, together, represented about $6 trillion of the U.S. mortgage market. All this was good. Business in housing boomed for years. Subprime mortgages and speculation began to flourish…until the housing slump. (It does seem to rain on every financial parade.)

As the housing slump wore on, Fannie and Freddie began spending their capital to back these defaulting mortgage loans. In late July, an independent audit revealed that as much as $50 billion was needed to shore-up these firms’ capital accounts. Given the large amount of U.S. debt that is held by other countries, and our ever increasing need to borrow, it was concluded that it is in the best interest of the U.S./world for the U.S. government to intervene. We could not let our credit rating fall. Moreover, without Freddie and Fannie able to participate in the mortgage market, it is estimated that housing prices might fall another 10% to 20%, as it becomes harder to qualify for a mortgage and liquidity is reduced. (Trust me, this is not good news, even if you are a young, first-time homebuyer.)What should you do?· Look at your net-worth statement. If you have debts costing you double digits rates of interest and you’re having trouble sleeping, pay off some debts. Your net-worth will be intact and you’ll be able to sleep.

· Make sure your portfolio is diversified and well balanced among asset classes. Try to resist the urge to look for the “phoenix-investment” rising from the recent carnage. While I do think there are investment bargains in today’s market, do not abandon the discipline of diversification. Do not invest money in a “bargain” that you cannot afford to lose. (In our “in-class” portfolio for my investments class, one of my students “purchased” Fannie Mae, Lehman Brothers, and AIG at the beginning of the semester. Oops.)

· Mortgage rates are beginning to fall. If you’ve an expensive or exotic mortgage that you’d like to abandon, explore your options to refinance. Perhaps, this is time to buy that home. Perhaps, this is a good time to add a real-estate investment to your portfolio.

· Remember that this will pass. Continue to focus on the things that really matter and that define you to be a success. In many cases, real success is much more than financial success.

NEWS FLASH: While I was writing, a report has surfaced that a new entity, similar to the Resolution Trust Corporation, is being considered to handle the nation’s bad debt. As a result the Dow Jones Industrial Average is up 410 points, or 3.86%. What a day! What a week! What a year!

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Friday, September 12, 2008

This week’s visit from the U.S. Treasury

Many of you know that we, the US taxpayers, have taken over mortgage giants Freddie Mac and Fannie Mae. The U.S. Treasury acted in an effort to calm world financial markets. So far, the results of the decision have been mixed and the press seems more concerned about swine wearing makeup than the financial outlook for the world. (The Treasury pledged up to $200 billion to recapitalize the firms. We will undoubtedly borrow the money and pay it back with interest over time. Given today’s estimated U.S. population, your share of this potential debt is $655. “Thank you for your continuing support,” as the old commercial used to say.)

Regardless of the news, our academic department had a visit this week from Dan Iannicola, Jr., Deputy Assistant Secretary of the U.S. Department of the Treasury. Mr. Iannicola is responsible for the Treasury’s efforts to improve the nation’s financial literacy. While in Columbia, he spoke to one of our classes and to a class at a local high school. He left some tips for building wealth…

· Pay yourself first. Make savings a priority over non-necessary spending.
· Track all expenses for a month. Write a budget. Stick to it.
· Set specific, realistic savings goals: education, home ownership, retirement.
· Enjoy the magic of compound interest. Save early and often. Use your employer-based retirement savings plan.
· Use tax-advantaged methods for saving for goals like retirement, education, and healthcare.
· Establish an emergency fund.
· Avoid high cost credit.
· Pay your bills on time to help build your FICO credit score. Not doing so can limit your employment and housing choices, as well as increase the cost of insurance.
· Comparison shop for credit and credit cards.
· Get a free credit report at least once per year. Use .

Sound familiar? Enjoy your financial success…..

- Robert O. Weagley, Ph.D., CFP(r)
Chair, Personal Financial Planning
University of Missouri
Columbia, MO 65211

Friday, September 5, 2008

Are you heading for the “bad place”?

Many students do not recognize the importance of maintaining a good credit (FICO) score. A bad credit score can lead to, at least, two problems which should concern you. First, a low FICO score can be used by employers. Employers do not want to hire employees in financial difficulties. Financial difficulties cause stress and inattention at work, thus reducing employee productivity. Secondly, for similar reasons, credit scores are often used by insurance companies to set rates on insurance, especially automobile insurance. The conclusion, if you want a job and want the costs of driving to be the least expensive it can be, you need to work to increase your FICO score. Here are five credit behaviors that can take you to “the bad place” (where credit scores are low).

1) Make your payments late. Don’t be a slacker. Make sure your payment reaches the credit card company before the due date.

2) You are young and eager to establish your credit. That is, you are too young and too eager. Each credit application can lower your credit score, as you are potentially able to borrow more each time you apply. Remember, responsible use of a credit card you’ve had for a long period of time can increase your FICO score.

3) Destroying old credit cards too soon. When you open a new credit account, one is tempted to cancel the old credit account as soon as possible. While this may be best for you, if you’ve a spending problem, cancelling the old account actually will increase the percentage amount of your total potential credit you currently have outstanding.

4) Your spending is poorly timed. You make very large credit purchases too close in time to your job, insurance, or other applications. This increases the percentage of the total credit you have the right to use that you have already borrowed.

5) You do not check your credit score and correct errors. Errors in your credit report hurt you. Check your credit score at least twice per year. Check out to see your personal credit history. Correct errors, if any.

Of course, a surefire way to avoid a low credit score is to only borrow for convenience or for an investment in yourself, a business, or a home. Use the credit cards you use responsibly and try your best to not incur finance charges. To my knowledge, few find Financial Success with a negative net-worth.

For those of you in the Columbia, Missouri area: Next Tuesday (9 September 2008) at 9:30 a.m., we are hosting Dan Iannicola, Jr., Deputy Assistant Secretary for Financial Education at the United States Department of the Treasury. The talk will be held in 22 Tate Hall on the beautiful University of Missouri campus. His talk is named, “Don’t let your credit put you in a bad place”. (Yeah, I borrowed his title as the “take-off” for this week’s Financial Tip.)

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211