50 Unfortunate Truths About Investing

1. Saying “I’ll be greedy when others are fearful” is much easier than actually doing it.
2. The gulf between a great company and a great investment can be extraordinary.
3. Markets go through at least one big pullback every year, and one massive one every decade. Get used to it. It’s just what they do.
4. There is virtually no accountability in the financial pundit arena. People who have been wrong about everything for years still draw crowds.
5. As Erik Falkenstein says: “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”
6. There are tens of thousands of professional money managers. Statistically, a handful of them have been successful by pure chance. Which ones? I don’t know, but I bet a few are famous.
7. On that note, some investors who we call “legendary” have barely, if at all, beaten an index fund over their careers. On Wall Street, big wealth isn’t indicative of big returns.
8. During recessions, elections, and Federal Reserve policy meetings, people become unshakably certain about things they know nothing about.
9. The more comfortable an investment feels, the more likely you are to be slaughtered.
10. Time-saving tip: Instead of trading penny stocks, just light your money on fire. Same for leveraged ETFs.
11. Not a single person in the world knows what the market will do in the short run. End of story.
12. The analyst who talks about his mistakes is the guy you want to listen to. Avoid the guy who doesn’t — his are much bigger.
13. You don’t understand a big bank’s balance sheet. The people running the place and their accountants don’t, either.
14. There will be seven to 10 recessions over the next 50 years. Don’t act surprised when they come.
15. Thirty years ago, there was one hour of market TV per day. Today there’s upwards of 18 hours. What changed isn’t the volume of news, but the volume of drivel.
16. Warren Buffett’s best returns were achieved when markets were much less competitive. It’s doubtful anyone will ever match his 50-year record.
17. Most of what is taught about investing in school is theoretical nonsense. There are very few rich professors.
18. The more someone is on TV, the less likely his or her predictions are to come true. (U.C. Berkeley psychologist Phil Tetlock has data on this).
19. Related: Trust no one who is on CNBC more than twice a week.
20. The market doesn’t care how much you paid for a stock. Or your house. Or what you think is a “fair” price.
21. The majority of market news is not only useless, but also harmful to your financial health.
22. Professional investors have better information and faster computers than you do. You will never beat them short-term trading. Don’t even try.
23. How much experience a money manager has doesn’t tell you much. You can underperform the market for an entire career. And many have.
24. The decline of trading costs is one of the worst things to happen to investors, as it made frequent trading possible. High transaction costs used to cause people to think hard before they acted.
25. Professional investing is one of the hardest careers to succeed at, but it has low barriers to entry and requires no credentials. That creates legions of “experts” who have no idea what they are doing. People forget this because it doesn’t apply to many other fields.
26. Most IPOs will burn you. People with more information than you have want to sell. Think about that.
27. When someone mentions charts, moving averages, head-and-shoulders patterns, or resistance levels, walk away.
28. The phrase “double-dip recession” was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of “financial collapse” in 2006 and 2007. It did come.
29. The real interest rate on 20-year Treasuries is negative, and investors are plowing money into them. Fear can be a much stronger force than arithmetic.
30. The book Where Are the Customers’ Yachts? was written in 1940, and most still haven’t figured out that financial advisors don’t have their best interest at heart.
31. The low-cost index fund is one of the most useful financial inventions in history. Boring but beautiful.
34. For most, finding ways to save more money is more important than finding great investments.
35. If you have credit card debt and are thinking about investing in anything, stop. You will never beat 30% annual interest.
36. A large portion of share buybacks are just offsetting shares issued to management as compensation. Managers still tout the buybacks as “returning money to shareholders.”
37. The odds that at least one well-known company is insolvent and hiding behind fraudulent accounting are high.
38. Twenty years from now the S&P 500 will look nothing like it does today. Companies die and new ones emerge.
39. Twelve years ago General Motors was on top of the world and Apple was laughed at. A similar shift will occur over the next decade, but no one knows to what companies.
40. Most would be better off if they stopped obsessing about Congress, the Federal Reserve, and the president and focused on their own financial mismanagement.
41. For many, a house is a large liability masquerading as a safe asset.
42. The president has much less influence over the economy than people think.
43. However much money you think you’ll need for retirement, double it. Now you’re closer to reality.
44. The next recession is never like the last one.
45. Remember what Buffett says about progress: “First come the innovators, then come the imitators, then come the idiots.”
46. And what Mark Twain says about truth: “A lie can travel halfway around the world while truth is putting on its shoes.”
47. And what Marty Whitman says about information: “Rarely do more than three or four variables really count. Everything else is noise.”
48. The bigger a merger is, the higher the odds it will be a flop. CEOs love empire-building by overpaying for companies.
49. Investments that offer little upside and big downside outnumber those with the opposite characteristics at least 10-to-1.
50. The most boring companies — toothpaste, food, bolts — can make some of the best long-term investments. The most innovative, some of the worst.

http://www.businessinsider.com/50-unfortunate-truths-about-investing-2012-11

What Business is Wall Street In?

May 9th 2010 11:36AM

My last two posts were designed to stimulate discussion. But lets talk the real problem that regulators, public companies, investor/shareholders and traders face. The problem is that Wall Street doesn’t know what business it is in. Regulators don’t know what the business of Wall Street is. Investor/shareholders don’t know what business Wall Street is in.

The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else. To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.

The best analogy for traders ? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing. A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it. A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.

I recognize that one is illegal, the other is not. That isn’t the important issue.

The important issue is recognizing that Wall Street is no longer what it was designed to be. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings. What percentage of the market is driven by investors these days ?

I started actively trading stocks in 1992. I traded a lot. Over the years I’ve written quite a bit about the market. I have always thought I had a good handle on the market. Until recently.

Over just the past 3 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF. Combine that with the leverage of derivatives tracking companies, indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less comfortable playing. It is a game fraught with ever increasing risk.

The Pimco (who I think are the smartest guys on the Street) guys talk about a new normal as it applies to today’s state of the world economy. I think just as important is the new normal as it applies to Wall Street. Wall Street is now a huge mathematical game of chess where individual companies are just pawns. This is money in the bank for the big players like Goldman, Morgan, etc. Why ? Because the game of chess is far too complicated for 99pct of the institutions out there investing money. So to keep up, they turn to Goldman, Morgan and the like to invent products for them. “You don’t know how to play the housing boom, let us show you”. “You think the housing boom is about to crash, let us show you how to play that”. “You think that PIIGS are in trouble because they can’t print money to pay debt holders, let us create a product to allow you to play that game” The big houses have the best hackers in the business and they put together the games and sell them to the many, many institutions managing Billions and Billions of dollars. They are the ultimate Hackers selling their attacks to the highest bidder, regardless of which side they are on. That is a new normal.

Again, I’m not passing judgement one or the other. I’m just recognizing what is going on in the financial world today.

It’s rare for companies to go public these days. Just as rare for secondary offerings. The only thing that keeps me in the market is that most of the stocks (not all) pay dividends or some other sort of cash payout. For the first time in my life, I bought outside the United States. I bought Australia in a big way because it is becoming increasingly hard to find new domestic investments that are not influenced by the “hackers” and the games being played on a macro level. It’s hard to believe, but evaluating countries as an investment is now easier than evaluating companies. Even with all the unrest in Europe. Or maybe because of it.

So back to the original question. What business is Wall Street in ?

Its primary business is no longer creating capital for business. Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. (I would be curious if anyone out there knows what percentage of transactions actually return money to a company for any reason). It wouldn’t shock me that even in this environment that more money flows from companies to the market in the form of buybacks (which i think are always a mistake), then flows into companies in the form of equity.

My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business. Whether its through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years. However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy. It won’t come from traders trying to hack the financial system for a few pennies per trade.

And solutions won’t come from bureaucrats trying to prevent the traders from hacking the system. The only certainty when bureaucrats step in is that the law of unintended consequences will smack us all in the head and the trader/hackers will find new ways to exploit the system that makes them big money and even more money for the big institutions that develop products for the other institutions that are desperate to play the game.

Regulators have got to start to recognize that traders are not investors and vice versa and treat them differently. Different regulations. Different tax structure. Different oversight. Individual investors and the funds that just invest in stocks and bonds are not going to crash the market. Big traders who are always leveraging up and maximizing the number of trades/hacks they make will always put the system at risk. We need to recognize that they do not serve much of a purpose other than to add substantial risk to the global economy. That their stated value add of liquidity does not compensate the US and World Economy nearly enough for the risk of collapse they introduce into the system.

Wall Street as a whole needs to be in the business of creating capital for companies and selling shares to investors who believe they are shareholders. The Government needs to create incentives for this business and extract compensation from the traders/hackers for the systemic failure level of risk they introduce.

There will be another crash, because there are too many players looking for the trillion dollar score. They can’t all win, yet how many do you think wouldn’t risk everything, even what is not theirs, for that remote chance to score big ? Put another way, there is zero moral hazard attached to any trade. So why wouldn’t traders take the biggest risk possible?

Update at 10pm 5.9.10

One more consideration. If there are traders of any kind that are unregulated or unmonitored, and trade for their own account, how do we know how big they are and how much of a threat they pose to the system, individually and in aggregate ?. For any High Frequency or big leverage derivative folks out there- is it possible there could be firms that have billions at risk with questionable ability to make a margin call or fulfill their side of the trade if things went against them ? Could there be hidden AIGs that few people know about or a bunch of AIG like situations ,which in aggregate fail and put the system at risk ? I have no idea. Just asking the question.

http://blogmaverick.com/2010/05/09/what-business-is-wall-street-in

View of retirement at 107

Eight years ago, at age 99, Leonard McCracken failed the eye test for renewing his driver's license. He put his Lincoln Continental up for sale and got $1,600. "I sold it in three days -- I got a good price. I love to haggle," he says.

McCracken, who lives in Florida, has been living in retirement since about 1969, when he left a position as a salesman with a now-defunct steel company in Ohio. Since then, he's been living on savings, Social Security and a lifetime annuity that he purchased before he retired. He has never had a pension. At 107, after living in retirement for 41 years, he's still paying the bills and getting by on his own resources.

"Dad never made more than $10,000 a year in his life," says his son Bob, a 73-year-old retired GE aircraft engineer.

How does a guy with modest income manage such a retirement planning feat? McCracken points to a half-dozen basic principles that have gotten him through life and continue to serve him well.

Thrift
In his whole life, McCracken says, he has only owned two new cars. The rest of the time he bought used. He still shops at the thrift store. And he remembers vividly the time that his wife was holding a garage sale and left him in charge. When she returned, he had sold the living room sofa for $100. "I had a very understanding, frugal wife (Dorothy, who died in 2002 at 95 after 75 years of marriage). We gave up a lot of things that other people were buying in order to break even."

Real Estate Investments
McCracken bought and sold 35 houses in his life, including five that he built himself. His son, Bob McCracken, says his parents "always invested in a nice house and that has helped my dad. He is living off the equity in the last home he and my mother owned."

The elder McCracken agreed that buying and selling real estate was a smart move for him. "We didn't make a lot of money in every case," he says. "But we made something and that helped."

What is his advice for current owners of real estate? "It's bad now, but it will come back," he says. "And people who buy now, they'll make a lot of money," he says.

Use Debt Well
During the Great Depression, McCracken worked for a bank. He watched people lose their shirts and learned from it. Throughout his life, he borrowed when he had to, but he borrowed as little as possible, he says, and he paid it back as quickly as he could.

Work Even When Jobs Are Hard to Find
McCracken was unemployed about 45 years ago after his previous employer went bankrupt. He had to take a job driving a truck that paid $5 per day. It was a low point in his life, but between that and a commission sales job that he took at night, he and his family muddled through until he got back on his feet.

Save and Invest Conservatively
All of McCracken's money is in CDs and bonds. He's always avoided the stock market, even when people who purported to know more than he advised him differently. "When the economy tanked, he made a lot of us look real silly," Bob McCracken says.

Stay Healthy
McCracken has hung onto his health and his wits and has had no major medical bills at all throughout his entire life. It has only been in the last year that he's needed a little assistance. And even then, he doesn't need much, his son says.

http://www.bankrate.com/financing/retirement/view-of-retirement-at-107

15 Ways to Never Run Out of Money

Savings, investment, and lifestyle strategies for all ages.
The American economy may be moving like molasses in January, but have no doubt, it is moving. Between late 2008 and 2010, the Standard & Poor's 500 index rose in healthy double digits to the point that many investing stalwarts who stayed in stocks recouped the money they'd lost in that period, and then some. The national savings rate -- income minus taxes and household expenses -- rebounded from a negative number in 2006 to almost 6 percent in October 2010, according to the U.S. Bureau of Economic Analysis.

For many, the economic recovery isn't so much crawling as stalling. But regardless of the state of your finances, now is a good time to begin planning a future that's secure. That means creating a plan to ensure you don't run out of money in the near term or far in the future. And paradoxically, it may mean creating a lifestyle that doesn't place money at its core.

When the Consumer Reports National Research Center recently surveyed 24,270 online subscribers age 55 and up about their finances and satisfaction with their lives, we found some common keys to peace of mind that had little to do with big salaries or high living. They pointed to active steps they'd taken as well as pure luck: enjoying good health, planning ahead, maximizing savings, having hobbies and friends, and staying in a job with a defined-benefit pension, which provides a regular income in retirement for life.

And when we interviewed several survey respondents as well as younger workers still in savings mode, we found another common element. A number mentioned living within, and sometimes below, their means. "Most of our entertainment is with friends and neighbors," said Vernon Chestine, 68, a Charlotte, N.C., retiree who participated in our survey. "I feel really fortunate to be in the position we're in."

In this report, we offer 15 ways to ensure you don't run out of money on your way to personal satisfaction, while you work and after you retire. Our survey respondents and the people we profile on these pages demonstrate their "best practices" that anyone can emulate. Employing just a few of them can pay off big-time in the long run.

Do You Need a Pro?
Among pre-retirees who had consulted a financial planner within the 12 months ending in October 2010, 67 percent reported gains in their retirement accounts during that period. But among those who hadn't met with their planner recently, 59 percent saw investment gains. And 57 percent with no planner experienced gains as well.

Indeed, our survey showed that saving more money and investing more in retirement accounts had the greatest payoff during the period, planner or no planner.

Starting Out
The habits you establish early in life can have a positive impact on your finances.

1. Live Modestly
For those millions of Americans currently out of work or underemployed, that is not a choice. But even when times improve, living within your means has its benefits. Retirees in our survey who were most satisfied with their situation credited living modestly as among the best steps they'd made earlier in life. "Since we never were extravagant people, we live just fine," says Pancho Garcia, 67, of Mebane, N.C., a retiree who participated in our survey.

And self-control has its rewards. Mary-Jo Webster, 39, and her husband, Jamey, 37, bought a house four years ago in Arden Hills, Minn., that was significantly smaller and less expensive than what they could afford. And they resolved to try to live on just one income. That decision paid back with interest when Jamey quit his job in computer technology to stay at home with their twins, Benjamin and Madeline, 2.

2. Keep to a Budget
As the Websters and other young couples we interviewed found, financial discipline is essential. Ensuring your money will last your lifetime begins with knowing how to make your paycheck last the month.

Toward that goal, create a basic spending plan or budget. At its simplest, a budget involves splitting your expenses into have-to's and want-to's, and paying the have-to's first. Start with tracking your spending for a couple of months. You can use free budgeting applications on websites such as Mint and Google Docs, or a pencil, paper, and a calculator. Setting some short- and long-term spending goals may make it easier to stick to your plan. Include payments into an emergency fund until you have at least enough for six months of household expenses set aside.

3. Start Saving Early
Retirees who began saving and planning early -- say, in their 30s -- had greater net worth: $1.1 million on average, compared with $868,000 for those who waited until their 40s, and $651,000 for those who started later, our survey found. Thirty-nine percent of retirees said they regretted waiting to save.

Most young workers today don't have access to traditional, defined-benefit pensions funded by employers, so they have to put enough money away during their careers to generate a comparable income stream. To do so, they need to take advantage of options offered by their employers. A growing number of employers automatically enroll new workers in a 401(k) or other retirement savings plan, typically deferring 3 percent of pretax income into a mutual fund targeted to an expected retirement date. The good news: Most new workers don't opt out of contributing once they're automatically enrolled. The not-so-good news: They also don't raise that contribution beyond the initial 3 percent. For the best results, they should eventually boost their deferrals to at least 10 percent of their income.

The young workers we interviewed appear to be heeding that message, contributing at least enough to their retirement accounts to earn the free money their employers offer in matching contributions. And the benefits of the Roth version of IRAs, 401(k)s, and 403(b)s are gaining attention. If you're single and under 50, and your modified adjusted gross income is less than $120,000 (less than $177,000 for couples filing jointly), you can put up to $5,000 of after-tax income into a Roth IRA and avoid any additional federal tax on that money and its gains if you have the account for five years and wait until age 59 1/2 to begin taking it out. It's a potential boon for lower-income earners who fall into low tax brackets now but may face much higher rates when they retire.

Young, on a Budget, and Planning Ahead
After racking up $8,000 in credit-card debt two years ago from their wedding and a move to Portland, Ore., Claire and Chris Angier, both 30, started tracking their expenses. Claire, a teacher, and her engineer husband follow a simple plan: They put aside money in their bank account toward debt, rent, utilities, and other essentials, and split a set amount to spend as they like. Using cash rather than credit for discretionary spending helps keep them on track. "You physically see the pile getting smaller," Chris says.

The Angiers apply discipline to their leisure pursuits -- he's a marathon runner and she teaches exercise classes -- and to their finances. Chris puts 11 percent of his pretax income into a 401(k) plan, reaping a generous company match. Claire, who's eligible for a pension, puts 5 percent into a 457 retirement plan. They're whittling down their educational debt while paying off a higher-interest car loan. And they're building equity in a rental property in Syracuse, N.Y., purchased on the cheap during their grad-school days.

They frequently discuss their finances. "Talking about money is not a taboo subject," Claire says. No doubt that will help when they welcome their first child this spring. "I think we'll continue to budget," Claire says. Chris adds, "It's a habit now."

The Middle Years
In this age range, roughly late 30s through mid-50s, workers have the potential to earn the bulk of their income. But they also face the competing challenges of putting away money for retirement and funding their children's college educations. Our survey results point to some useful strategies:

4. Diversify Your Holdings
Having a variety of investments -- stocks, bonds, and real estate, among others -- correlated highly with net worth in our survey, regardless of income level. Retirees with seven or more types of investments had an average net worth of $1.4 million. Those with three or fewer had an average net worth of $678,000.

For the average investor, whose savings are mainly in an employer-sponsored retirement plan, diversification means spreading that money among a broad mix of stocks and bonds. Index mutual funds typically have low costs -- a key positive factor in overall performance, says a recent study by Morningstar, the Chicago-based investment research company.

5. Prioritize Retirement Over College
You can borrow money for a college education, but you can't borrow toward your retirement. So while it's fine to start a 529 savings plan for your kids, make funding it a secondary goal.

"Our philosophy is to ensure our retirement savings first," Mary-Jo Webster says. But the Websters expect to have their house paid off by the time their 2-year-olds are ready for college. So then, they'll channel the mortgage money toward tuition.

Speaking of education, consider paying your child a regular allowance, either for chores or good behavior, to help teach budgeting and saving skills. Children who are self-sufficient in money matters could very well be less likely to pose a financial burden to their parents.

The Middle Years: Discipline and Diversification
Mike and Miriam Risko understand harmony. As performers and owners of a music school and store in Ossining, N.Y., the couple, in their early 40s, have been playing off each other's strengths for 20 years. Together, they built a one-person school into an operation employing 30 part-time music teachers.

The Riskos, married 10 years, put a healthy portion of their annual income into a profit-sharing plan. In 2009 they bought the building that houses their business. "They had the good sense to do this early," says Camille Cosco, a chartered financial consultant who has steered the Riskos' savings into a well-diversified mutual fund portfolio.

The couple learned how to stretch their money at a young age. Mike paid his way through college playing guitar. At 22, Miriam, a singer, started to save up to half of each paycheck. A small inheritance she received a few years ago went to a 529 college savings plan for their son, now 7. A 529 plan for their daughter, age 4, is on the to-do list.

Miriam acknowledges the challenge of passing on their money sense. "My son has a piggy bank with all of his change in it. Recently I said, 'Let's open a bank account. You'll get interest!' He said, 'You're not taking my money!'" she says with a chuckle. "We're still working on the piggy bank right now."

Pre-Retirement
From their mid-50s on, many people grow concerned about the adequacy of their savings. The pre-retirees we surveyed, most between 55 and 65, were generally less confident about their prospects than the retirees and those who had retired but still worked part-time. Although 44 percent said they were better off than they were a year before -- and those numbers have gotten better since 2008 -- about one-fifth of pre-retirees said they were worse off financially than they had been a year before. That said, there's still hope if you're behind. Here are some ways to improve your strategy.

6. Stay in the Game
A Fidelity Investments study of the balances of its 401(k) participants age 55 and up found a real benefit to perseverance. Those who continuously contributed to their plans doubled their average account balance in the 10 years ending the third quarter of 2010, which included the financial fiasco of 2008 and 2009.

To be sure, some two-thirds of the doubling in value came from contributions from savers, not from their investments' appreciation. But so what? Those investors are twice as well off in nominal dollars than they were a decade ago, and much better off than people who tried to time the market -- those who sold their stocks during the panic and missed out on a precipitous rise in value that followed.

You should periodically assess your asset allocation -- how your money is divided among stocks, bonds, and cash. As you age, you might want to move more of your assets into less-risky investments. Vanguard founder John Bogle advises that the percentage of your portfolio allocated to bonds and cash should equal your age.


28 Percent
That's the percentage of partly retired survey respondents who said they were highly satisfied with their retirement planning. Only 21 percent of those not yet retired said they were highly satisfied with their planning.

7. Catch Up
Retirees who said they were highly satisfied counted maxing out contributions to an employer-sponsored retirement plan among their best steps. Once you're free of college-finance and child-rearing costs, put the extra savings there until you max out. In 2011 the limit for pretax contributions is $16,500 a year, plus another $5,500 in catch-up contributions for those 50 and up.

8. Pay Off Debt
Accelerate payments on your mortgage with an eye toward paying it off by retirement. That might seem counterintuitive, given the past year's stellar market performance, when putting extra cash in the S&P 500 would have provided a better return. But given the market's ups and downs, that strategy can backfire; just as you're ready for retirement, you could be stuck with losing investments and a mortgage still to be paid. Besides, our survey found a correlation between satisfaction in retirement and lack of significant debt. Nonetheless, an alarming 39 percent of retirees still had at least $25,000 in mortgage debt.

9. Budget for Health-Care Costs
Even with Medicare coverage, expect to pay a significant amount out of pocket for health care. Fidelity Investments published a study last year showing that the typical couple retiring in 2010 would incur $250,000 in health-care costs during their retirement years, outside of their Medicare benefits.

That incredible figure isn't so wild when broken into components: annual premiums for Medicare Parts B and D; deductibles and co-insurance for Medicare Parts A and B, plus cost sharing for prescription drugs; and benefits not covered by Medicare, including eyeglasses, contact lenses, hearing aids, and private-duty nursing. Those figures represent a national aggregate figure, so costs in some regions could be higher.

And that number doesn't take into account the cost of long-term care. To research average costs in your area, go to the National Clearinghouse for Long-Term Care Information and click on "Cost of Care." That cost is not covered by Medicare or other health plans. If you expect your assets in retirement to be under $300,000 (not including your home), you probably can't afford long-term-care insurance, though you might qualify for government help should you need long-term care. If you think you'll have more than $2 million, you can probably afford to pay for your own care, if needed. Those in between might want to consider a long-term-care insurance policy, though be aware that those policies are expensive and complicated.

10. Time Your Payout
Opting to receive your first Social Security check at 62, the minimum age, reduces your payout. Someone born in 1954 who decides to retire at age 62, for instance, would get 25 percent less than he or she would get by waiting until the full-retirement age of 66. If you're tempted to begin your benefits early, be aware that each year you delay, up to age 70, earns you up to 8 percent more in income depending on your age, a respectable guaranteed return.

Pre-retirement: Research and Perseverance
Ken Ranlet started from scratch on his retirement plans after his divorce at age 44. Now 59, Ranlet, of New Fairfield, Conn., feels fairly certain he can retire by 65 in comfort.

How is that possible? Part is luck. The multinational company he's worked for over the past 15 years offers both a 401(k)-like retirement plan and a defined-benefit pension. But Ranlet, who has two grown sons, also saves diligently, lives modestly, and uses every resource offered him. He has always put at least 7 percent of his salary into the company's retirement plan to nab the 50 percent match. When he finished paying his sons' college tuition, he upped his retirement plan contributions to max out. He added the annual "catch up" for those over 50 "the minute I could take advantage of it," he says.

Ranlet also educated himself about diversification, sparing himself some of the losses that many experienced in the 2008-'09 market plunge. "I tried to spread the money around: some international, some short-term bond funds, some long-term bond funds," he says. To plan retirement, he interviewed his parents, in northeastern Pennsylvania, and his aunt and uncle in Syracuse, N.Y., about their retirement lifestyles. Their experiences helped him to "benchmark my own tastes and expectations," he says.

And what are those expectations? A home in less-costly upstate New York, with room for company and his model train sets, and a big woodworking shop in the basement. "I don't live to drive a Maserati. I don't feel I need to take a superfancy cruise," he says. "I can enjoy a week at the Jersey shore just as well. I don't have to have the latest and greatest as long as what I have is serving my needs."

Retirement Years
One element pervades our happy retirees' responses: a pension. Having steady money coming in each month was a common factor in retirees' satisfaction, whether their net worth was $250,000 or more than $1 million. But our survey found that pre-retirees are less likely to have a pension than current retirees.

Sensing a growing market for guaranteed income in retirement, financial companies have invented products and adapted old ones to offer guaranteed income and protect against "longevity risk," the threat that you'll outlive your money. Here are some considerations.

11. Tread Carefully With Annuities
Our survey respondents mostly shied away from annuities, investment-based insurance products that guarantee lifetime income. Only 2 percent of working people and 1 percent of retirees named buying an annuity among the best steps they had taken toward or in retirement. Among the possible concerns: high management fees, stiff sales commissions, and the potential loss of cash value if you die prematurely.

But a new type of deferred annuity called longevity insurance holds some promise for those concerned they'll live beyond their assets. At retirement you pay an insurer a lump sum. Years later, typically at age 85, you begin to receive to a fixed payout. Because you're not paying for as many years of coverage, you don't have to invest as much in these products as you would with an annuity that starts its payouts earlier. Jason Scott, managing director of the Retiree Research Center at Financial Engines, an online personal finance service, projects that a 65-year-old retiree putting about 11 percent of his assets into longevity coverage and the rest into zero-coupon bonds -- which pay all their interest at maturity -- would have 34 percent more money to spend during the subsequent two decades than if he had invested only in the bonds.

12. Follow the 4 Percent Rule
Withdrawing 4 percent annually from your retirement funds has been shown to preserve your capital for at least 30 years in even strained economic environments, assuming you rebalance regularly. In recent years, some economists, including Nobel laureate William Sharpe, have attacked the 4 percent philosophy as inefficient and potentially costly to retirees. Still, many financial advisers hew to it because it's simple to understand.

New mutual funds, called managed-payout or income-replacement funds, attempt to provide investors with a regular payout while leaving the decisions about what to liquidate and rebalance to a fund manager. On the downside, payouts for such funds aren't guaranteed, because they're based on how well the fund does.

Because managed-payout funds are relatively new, their performance is hard to judge. But the Consumer Reports Money Lab recently analyzed how well the components of one such family of funds, the Vanguard Managed Payout funds, had performed. If you had invested in them and then withdrawn your money at rates of 3 percent or 5 percent a year between 1989 and the end of 2009, your holdings would still have grown. Even a 7 percent payout would have basically held its own. Our Money Lab conclusion: The 4 percent rule protects disciplined investors in a variety of circumstances, whether they buy a managed-payout fund or manage their funds themselves.

13. Fill Up a Big Bucket
An intuitive way to manage your portfolio is to put your money into "buckets" depending on when you might need it. In a simple version of this approach, the first bucket should hold enough cash to cover two years of living expenses. The first year's portion should be liquid, say in a bank account or money-market fund. The second year's expenses can be invested in a ladder of CDs or short-term bonds (one- to two-year maturities). Money for a special purpose within five years -- say, a car or vacation -- should be kept in a separate account.

A second bucket can hold short- to intermediate-term bonds and funds. A portion of the bond bucket, say, one-third, can be in a short-term bond ladder, which can serve as an additional emergency fund and generate cash to draw from. With this approach, even in an emergency, "you won't be forced to sell at the bottom of the market," notes Harold Evensky, a certified financial planner in Coral Gables, Fla.

In your second bucket, also include a diversified intermediate-term bond fund or include a mix of attractive corporate and municipal bonds. The remaining third of the second bucket can include Treasury Inflation-Protected Securities, or TIPS.

Your third bucket can hold stock funds and up to a 5 percent stake in commodities, such as a gold exchange-traded fund. As you get into the later stages of retirement, the returns that you earn from stocks can be funneled back into a growing cash-and-bond allocation.

14. Hedge Against Inflation
If you lived through the '70s and early '80s, you can attest to the corroding power of inflation. To protect yourself in retirement, continue to invest a portion of your money in stocks and devote 5 to 10 percent of your money to TIPS and I-Bonds. You can buy TIPS, which have maturities of five, 10, and 30 years, from the U.S. Treasury; a bank, broker, or dealer; or through a mutual fund. I-Bonds are also sold by the Treasury, and at banks and credit unions. When inflation heats up, TIPS grow in value, throwing off more income. I-Bonds pay both a fixed rate of return and a variable inflation rate. As a bonus, interest on I-Bonds and TIPS is exempt from state and local income taxes.

15. Work Longer
Twenty percent of our survey respondents worked part-time in retirement; 37 percent of that group said they needed the income. But the psychic benefits of continued employment also were important to many. More than half said working made them feel useful; 38 percent said they enjoyed work too much to give it up.

In spite of being employed part-time, 45 percent of semi-retired workers under 65 were already collecting Social Security benefits. That's often not a wise choice for those below full retirement age. For every $2 you earn above $14,160, Social Security deducts $1 from your benefits. Once you reach full retirement age, you're entitled to all your benefits, regardless of how much you make. For more information on how Social Security calculates those benefits, check out ssa.gov/pubs/10069.html.

Retirement: A Few Earned Niceties
"We've played it pretty tight all these years, and now we're reaping the benefits," says Daniel Dittemore, 68, about his current lifestyle with his wife, Betsy, 67. With their savings and pensions paying out, the retired couple from Ankeny, Iowa, are enjoying the storied fruits of retirement: time and money to visit their children and grandchildren, a couple of nice vacations abroad, country club membership. Add to that golf, volunteer work, card games, and exercise.

"Most of the steps we've taken are things that any normal person thinking about retirement thinks about," Betsy says. That includes maximizing their 401(k) contributions while they worked and paying off their mortgage. But the couple also lived for years "not within our means, but beneath," Betsy says. They started raising their two daughters in a small, three-bedroom house with one bath and eschewed big purchases like the boats and RVs that sat in their neighbors' driveways.

And in what Daniel called a conscious choice, they chose public-sector jobs known to pay less but provide security later. He served as an urban planner for years, mainly for local governments. She worked part-time in administrative roles, rising to full-time legislative liaison for a state agency.

"Frankly we probably wouldn't have the lifestyle we have if we didn't have pensions," Betsy says. But, Daniel adds, they earned them.

http://financiallyfit.yahoo.com/finance/article-111733-7972-1-15-ways-to-never-run-out-of-money

50 Ways to Improve Your Finances in 2011

Goal-setting:

1. Decide on your big goals. Do you want to have more money in your bank account? Take a five-star vacation? If you're having trouble putting your finger on it, ask the people who know you best. Brainstorming with your significant other, family members, and friends can help shake loose your own thoughts.

2. Share those goals with other people. Telling friends and family members about your plans will help you stick to them. But you don't necessarily have to share your goals with people you know. At 43things.com, strangers list goals such as "save 20 percent of what I earn" or "identify 100 things that make me happy (besides money)." The website MyLifeList.org can also help; after you make a list of your goals, you can share them with others and give and receive encouragement.

3. Do a little every day. Take small steps toward your big goals every day, even if it means spending 60 seconds checking out a relevant website before bed. If you want to launch a small business, for example, small steps can include purchasing your website name, interviewing Web designers, and reading a book or two on being an entrepreneur. The most successful savers profiled in Generation Earn started by automatically saving a small percentage of their income; Nicole Mladic, a 31-year-old communications director in Chicago, couldn't afford to put away a big chunk of her salary when she was in her mid-20s, so she started saving 2 percent. A few months later, she raised it to 3 percent, then to 4 percent, and eventually she reached her goal of 10 percent. Today, her net worth is more than $90,000.

4. Take time to reflect. Look back on 2010. What were your personal money highs and lows? What mistakes did you make and what challenges did you face? What financial decisions are you most proud of?

Spending:

5. Get rid of junk mail. The website catalogchoice.org lets retailers know which customers no longer want to receive their mail. Participating companies agree to stop sending any more catalogs within three months. Signing up with 41pounds.org halts junk mail. The Direct Marketing Association (the-dma.org) will let its members know when people sign up to stop receiving direct-mail marketing offers. Junk mail piles up over time, so these fixes can really make a difference in the long run. The Environmental Protection Agency estimates that Americans receive four million tons of junk mail each year, almost half of which is never even opened. In addition to saving paper, you'll prevent yourself from spending needlessly by avoiding the temptations on those glossy pages.

6. Stop receiving E-mail sales alerts from your favorite retailers. Electronic junk mail might not carry the same environmental impact, but it can still convince you to spend money on items you don't need. Unsubscribe to retailer alerts to avoid the temptation.

7. Negotiate one big-ticket item each month. Often, big-box stories and department stores offer some wiggle room on their posted prices, especially when competitors offer a product for less. Before making any significant purchases, especially electronics, comparison shop and be prepared to ask the store clerk if their company can give you a better deal.

8. Get familiar with comparison and coupon websites. Websites such as PriceGrabber.com, BradsDeals.com, and Dealnews.com can help you pay less for items you buy often as well as splurges. Get in the habit of checking these sites before buying anything online or shopping in stores.

9. Budget by the year. Research shows that budgeting by the year instead of the month makes it easier to stay within your spending limits. That's partly because when we create an annual budget, we remember to take into account occasional expenses such as gifts.

10. Keep a spending diary. Even if you just track every dollar you spend for two weeks, it will open your eyes to where your money goes and what you could cut back on. You might not realize that you spend $100 a week on lunches, or that your taxi-cab habit is eating up half of your discretionary income.

11. Take advantage of your bank's free tools. Banks are increasingly offering easy ways of tracking your spending online. If your bank offers a free tool, use it to see where your money is going and where you can cut back.

Security:

12. Check up on your insurance. Do you have the auto insurance, renters insurance, and life insurance that you need? According to Allstate insurance, 2 in 3 renters skip insurance altogether, even though most people could benefit from the protection and it's relatively cheap. Life insurance is another awkward topic since no one wants to talk about death. But many people are under-insured, which puts their families at risk. Review the insurance that you have and decide whether you have the right amount.

13. Write a will. Consider working with a professional to make sure your assets will go where you want them to upon death; if you have any minor children, appointing a guardian is essential. At the very least, explore some of the online sites that allow people to write their own wills, such as buildawill.com and legacywriter.com, if you have a simple situation. (Financial experts say most people benefit from working with a professional.)

14. Protect your privacy. Whenever someone asks for your Social Security number, question if it's necessary to share it. Never give it to a solicitor on the telephone or in an E-mail, and if you ever notice a suspicious charge on your credit card, follow up with your card company—it could be the first sign of identity theft.

Saving:

15. Write down how much money you want to save by the end of the year. As with your other goals, the simple act of writing it down will help keep that goal at the top of your mind throughout the year.

16. Become a better cook. Sometimes you have to spend money to save money. Nowhere is that truer than in the kitchen, where investing in a few key pieces of hardware can help you cook better, faster, and cheaper. And anything that makes your food taste better and gets it on the table quickly can lessen the temptation to order budget-busting take-out. Consider investing in a slow cooker to make meals even easier.

17. Reduce your utility bills. Making sure your home is properly insulated can save you money on heating and cooling costs. Using a programmable thermostat so that the temperature automatically rises (in the summer) and falls (in the winter) when no one is home during the day can yield annual savings of about 30 percent. While some 25 million households own programmable thermostats, only half actually use them.

18. Use less energy. Small changes, like closing doors to unused rooms or turning off the air conditioner during the day, can make a serious dent in utility bills. So can unplugging appliances, turning off lights, and shutting down computers at night. Even televisions can use power when they're turned off, so unplugging them when they're not in use saves energy. A $30 power strip, called the Smart Strip, automatically cuts power to devices that don't need it when they're off, such as a DVD player, while maintaining power to those that do, such as a cable box.
19. Use fewer products. Instead of lathering up with soap, shaving cream, shower gel, and body scrub, Diane MacEachern, author of Big Green Purse, suggests cutting back to just a handful of products. "Put everything you use in one day on the counter and it will blow your mind. Pick a day where you just brush your teeth and your hair and forget about the rest," she says. In addition to creating less waste, the change will lower your monthly drugstore bills, because you won't be buying all of those unnecessary lotions and creams. You can save up to $200 a year.

20. Start making cleaning supplies from scratch. Even Martha Stewart endorses this technique. A bowl of vinegar or simmering lemon rinds can absorb smells just as well as manufactured air freshener. Scrubs made of baking soda and water make kitchens sparkle just like chemical-laden cleaners. The Internet contains hundreds of do-it-yourself recipes; Jennifer Taggart's thesmartmama.com can get you started.

21. Find inspiration online. There are hundreds of personal finance blogs and websites; find the ones that speak to you and visit them regularly to help keep you on track. Popular options include Wise Bread, The Simple Dollar, and Centsible Life.

22. Give yourself a stress test. How vulnerable are you to sudden job loss or unexpected expenses? Do you have an emergency fund? If not, start building one. You should have at least three months' worth of living expenses in your bank account.

23. Work with family members. Sometimes, family members can help each other save more money by working together. Adult children are increasingly living with their parents, for example, but this arrangement doesn't have to be a burden if the adult children contribute to household costs or pay rent. You can also help out by gardening, doing housework, or sharing your computer skills.

Investing:

24. Decide what type of investor you want to be. If you're like most people, you probably want to skip stock-picking and put your money in low-cost index funds instead. Create a diversified portfolio, with longer-term savings in more aggressive investments (such as an index fund that tracks the S&P 500) and shorter-term savings in safer spots such as money market funds.

25. Begin investing today. Waiting to start a retirement account until you feel like you can afford it might mean that you can never retire. Don't put off opening a 401(k) account if your employer offers it, even if you start by contributing just 2 percent of your salary. Soon, you can raise that percentage to 4 percent, and eventually to 10 percent or higher. For extra motivation, plug your numbers into a retirement calculator on Bankrate.com, and see how much you need to fund your golden years—it's probably much more than $1 million.

26. Ignore the market (for the most part). Focusing too much on the ups and downs of the market just causes stress. When the market's plunging, instead focus on your hobbies, family, and getting outside. Avoid cable television news, which often treats every dip in the market like a major crash. If your investments are well-diversified, you've done all you can.

Debt:

27. Pay off your expensive debt, even student loans. Student loans that carry a 5 or 6 percent interest rate (or higher) are costing you much more than your savings can earn in this current low-interest rate environment. Paying off a chunk of your student loans will immediately start saving you more money than you could if you continue to make those slow-and-steady monthly payments. Of course, not everyone has the cash to pay off a large portion of their loans, and it will probably take five-plus years after graduation to get to the point when you can even consider it. But once you have a healthy bank account, don't wait too long to start paying off big chunks of those more-expensive student loans.

28. Choose the best credit card for you. If you pay your balance off each month, you should have a card that gives you rewards points. If you carry debt, just focus on getting the card with the lowest interest rate. Most people have multiple cards that aren't suited to their needs. Pick the one that fits you best and stop using the other ones. Don't close them, though, because that can hurt your credit score.

29. Improve your credit score. The easiest way to do this is by making steady, on-time payments every month and otherwise keeping your accounts in good standing. Get your free credit report once a year at annualcreditreport.com to check for any mistakes (and fix them).

30. Make a plan for paying off high-interest rate debt. If you carry any credit card debt, auto loans, or high-interest student loans, it's time to come up with a plan for paying them off. With interest rates on savings account so low, it often makes more sense to unload your expensive debt rather than continuing to make interest payments.

Retirement:

31. Run some numbers. Most people fail to calculate exactly how much they're on track to save, or how much they'll need, in retirement. Check out the retirement calculators available through your financial institution (Fidelity, T.D. Ameritrade, Transamerica, and T. Rowe Price have them, among others) or use free calculators from Bankrate.com. Experiment with different rates of returns, inflation rates, tax rates, and lifetime expectancy, since no one can predict those factors with any accuracy.

32. Ramp up your retirement savings by a few percentage points. Those calculations might convince you that you need to start saving more. To keep anxiety (and a major budget crunch) at bay, increase your savings in small increments. Start by upping your retirement account contribution 2 percent, and see if you can add another 2 percent in six months. Most people need to save about 15 percent of their salaries to be on track for a healthy retirement.

33. Consider opening up new tax-advantaged accounts. Make sure you know what tax-advantaged accounts are available to you. If you're currently not working, you might be eligible for a spousal IRA or Roth IRA. If you work full-time and have access to a 401(k), make sure you're taking full advantage of it. If your employer offers the relatively new Roth 401(k), which lets workers invest post-tax dollars into an account that will not be taxed again in the future, you might want to consider doing so.

34. Rebalance your retirement investments. If your investments have been battered by the stock market swings—and whose hasn't—it might be time to rebalance. For a quick evaluation, subtract your age from 100. That's roughly the percentage of your funds you should have in stocks, with the rest in more conservative investments such as bonds. If you're 40, that means you should have about 60 percent in stocks and 40 percent on bonds.

35. Check in with the Social Security Administration. Every year, wage earners receive a statement from the Social Security Administration, which provides a useful estimate of your future monthly benefits. It will help you determine how much you'll need to supplement with your own savings.

Earning:

36. Invest in your career—even when you're being frugal everywhere else. Investing in a career coach or development course can help you snag a promotion, get "unstuck" from a career rut, or transition into your dream job. The price of one-on-one coaching typically starts at about $200 an hour, but less formal advice can come from meeting with more experienced colleagues over lunch or coffee.

37. Start earning extra money on the side. Many people don't realize they have valuable skills that other people are willing to pay for, such as a second language or even craft skills. To get ideas for how to earn extra money, check out the services section on Craigslist and see what people are advertising—editing, gardening, and event planning. Earning just a few hundred dollars a month can help get you back on your feet, plus you'll get valuable job experience and the possible start of a successful small business that you can continue to grow.

38. Launch your own business. Have you always dreamed of being your own boss? Make this the year you start taking small steps toward that goal. Decide what you can sell, buy your website address, and consider taking on a few clients.

39. Use social media tools to boost your career. Making connections on Twitter, Facebook, and LinkedIn can enhance your overall profile in your field and strengthen connections that will come in handy when you're job-hunting. Many people err by not fleshing out their profile information on their social network accounts; start by adding more information about yourself, along with a photo.

40. Develop a back-up plan. In today's economy, no job is 100-percent secure. Create a list of steps you would take if you were to lose your job, even though you hope never to have to use it. Having a Plan B can give you peace of mind as well as a practical "to-do" list if you ever face the shock of an unexpected job loss.

41. Schedule creative time for yourself. Boost your productivity with scheduled downtime, in which you give yourself the freedom to brainstorm about new ideas and possibilities for yourself and your career. Todd Henry, founder of the Accidental Creative, suggests blocking out a regular time period and reading material that you wouldn't normally look at, such as an engineering magazine or copy of Vogue.

42. Consider asking for a raise. If it's been a while since you've seen an increase in your paycheck, it might be a good time to make an argument to your boss for why you deserve a raise. Put the reasons in writing and run the request by a friend to make sure it's as strong as possible. Of course, if your industry or company is experiencing especially difficult times, you might want to put that request on hold until business picks up again.

43. Free up your time and energy by outsourcing chores. Think of money spent on a cleaning service or grocery delivery as an investment in your career, because these things free up more time (and energy) for you to focus on your day (or night) job.

Giving:

44. Talk with parents and siblings about any support you expect to give to them. Giving doesn't relate only to charities; many people also support their aging parents and needy siblings. Make sure you understand what your parents or siblings expect from you, if anything, and that you can afford to provide them the support that they need. If you can't, talk with them about your limits and potential nonmonetary ways that you can assist them.

45. Choose a cause that you believe in. Many of us give haphazardly throughout the year, donating $30 for a friend's walkathon and $100 at a school auction. Instead, put some thought into the causes you'd like to support this year. Read a book or two to further educate yourself. For example, if you believe in ending world water shortages, then you might want to read When the Rivers Run Dry: Water—The Defining Crisis of the Twenty-first Century. If your passion is addressing poverty, then you might want to check out When Helping Hurts: Alleviating Poverty Without Hurting the Poor. . .and Yourself. Then, figure out what you can do to help

46. Learn everything you can about your chosen cause. Bill Gates shared this advice for would-be philanthropists with the New York Times: "The key thing is to pick a cause, whether it's crops or diseases or great high schools ... Pick one, and get some more in-depth knowledge" by traveling, reading, or volunteering. Studying up on your cause doesn't need to cost much money, but it will make you a more informed—and more effective—giver.

47. Look for free ways to give, too. Giving blood, signing up to be an organ donor, or donating the gently used books and clothes in your home can be just as helpful as monetary gifts. Your time, of course, is one of the most valuable things you can give, along with any special skills, such as computer expertise, to charities in need of such assistance.

48. Give better gifts. Surveys show that most Americans say they want to spend less and give more meaningful presents. When birthdays or other events come up, think about how you can give an experience, such as an afternoon at a museum or conversation over tea, instead of things.

49. Clean out your closet. Not only will you have a more organized space for the new year, but you probably have some valuable items—books, CDs, and games—that charities could make good use of. See what you have that you're ready to give away, then look up local charities in need. Be sure to retain a record of what you give for next year's taxes.

50. Join forces with friends. By forming a giving circle, a group of friends can pool their money for a good cause. The number of giving circles has doubled to at least 800 over the past four years, and the trend is partly frugality-driven. Combining money and time makes it easier to research charities more extensively, check up on how the funds are being used, and garner enough power as donors that charities make an effort to reach out to you. A representative might visit your donor circle one night to explain the programs, or invite you to participate in some of the charity's activities. To find a giving circle that already exists in your area, visit givingcircles.org.

http://money.usnews.com/money/personal-finance/articles/2010/12/27/50-ways-to-improve-your-finances-in-2011

How You Can Beat the Machines

Online trading using discount brokerage websites has made it a lot easier for people to buy stocks. But lately, stock investors feel like they've been tossed into a scene from Terminator 2 -- and it's not at all clear whether lowly human traders will be able to emerge victorious over the machines.

Fortunately, though, you have some strategies you can use to fight back. There are several fail-safe ways to make sure you don't fall prey to the automated shenanigans that have increasingly plagued the financial markets in recent years.

Trading at the speed of light
You don't have to be terribly old to remember the days when online trading wasn't available. In order to buy or sell a stock, you actually had to talk to a human broker, which made the full-service brokerage commission rates that industry leaders Morgan Stanley (NYSE: MS) or Goldman Sachs (NYSE: GS) charged seem much more reasonable in hindsight. Full-service brokers would, in turn, relay your trade to another actual person -- typically another brokerage employee -- on the trading floor, who would combine your order with those of many other brokerage clients to make trades with other traders at the stock exchange. You'd have to wait patiently as details of your final trade execution made their way back through the chain to your broker.

Now, buying stock is as simple as pushing a button. One way that brokers try to distinguish themselves is through superior stock execution; E*TRADE Financial (Nasdaq: ETFC), for instance, boasts a two-second trade execution guarantee for some market orders on stocks within the S&P 500, as well as exchange-traded funds. If it takes longer for E*TRADE to get your trade completed, they'll waive their commission fee on that transaction. TD AMERITRADE (Nasdaq: AMTD) has a similar provision for certain trades.

But technology has also introduced some scary practices. High-frequency trading, in which automated orders are placed at split-second intervals in an attempt to take advantage of momentary inefficiencies in the financial markets, has forced the traditional stock exchanges NYSE Euronext (NYSE: NYX) and Nasdaq OMX (Nasdaq: NDAQ) to adapt to competition from upstart trading platforms that cater to electronic trading. CME Group (NYSE: CME) has made a huge investment in technology that allows electronic traders to place their computers close to the CME's own computers, which manage futures and options markets for a variety of different financial products. The practices have been blamed for last year's Flash Crash and other past market disruptions.

Slow it down
Regulation of high-frequency trading may come in the future. But regardless of whether that happens, or what form future regulation takes, you should still prepare to defend yourself against those practices.

Here are three things you can do to minimize any negative impact from high-frequency trading:
•Trade less. With commission costs on the decline, the temptation to trade more frequently has never been greater. But if high-frequency traders are eating up a small fraction of your money every time you buy or sell a stock, the obvious solution is to minimize the number of transactions you make. Long-term buy-and-hold strategies cause the least damage from market-based frictional costs.
•Stick with liquid stocks and ETFs. During the Flash Crash, the vast majority of securities that were affected the most had relatively low average daily volume. Illiquid stocks and ETFs are especially vulnerable to automated strategies, because relatively small orders can move the markets violently. So when possible, choose investments with high trading volumes -- and when you do want shares of a lightly-traded stock or ETF, be sure to use limit orders to protect yourself from unexpected swings.
•Don't trust price swings. It's entirely possible that artificial trading algorithms will create price movements that wouldn't have occurred otherwise. It's essential that you recognize those movements for what they are, rather than mistakenly assuming that they have some connection to the fundamentals of the stock's underlying business. You can't just trade by intuition anymore; only if you have a firm grasp of the intrinsic value of a company you invest in will you know when a stock's price movements are being manipulated by unusual trading activity.

Don't let the machines win
It's scary to go up against computers trading millions of shares per second. But if you stick to your guns, you can still invest well against the best computer algorithms. By focusing on the long-term prospects for great stocks, you'll find the only way to win against the machines: refusing to play the game by their rules.


http://www.fool.com/investing/brokerage/2011/01/04/how-you-can-beat-the-machines.aspx

How to Find Out What Your Business Is Really Worth

Whether you want to sell or not, it’s natural to wonder what your business could fetch on the market. Entrepreneur John Warrillow offers up some resources.

Years ago I owned a little marketing and design agency and would rely on the multiples the big advertising agency holding companies got on the stock exchange to figure out its value. I’d assumed that, because Omnicom was trading at 22 times earnings, my little agency with $150,000 in profit was worth around $3 million.

I got a wake up call at an industry event when I found out that, in actuality, small ad agencies with less than $5 million in revenue were lucky to get three or four times pre-tax profit—much of which was tied to achieving goals in the future.

Since then, I have started a couple of other businesses and gotten a bit better at estimating their value. It’s still tricky and ultimately a business is only worth what someone will pay for it. But I found I could cobble together a decent estimate through a few resources:

A fancy lunch with a professional

When I went to sell my research company, I bought lunch for three mergers and acquisitions professionals. Each had experience selling research companies similar in size to mine. Their back-of-the-napkin estimates all ended up being plus or minus 25 percent of the actual selling price.

Business Valuation Resources

Business Valuation Resources (BVR) gathers historical information about businesses that have sold recently and comes up with some industry norms.

I found BVR to be a good start, but oftentimes its descriptions of industries were too generic to make for good apples-to-apples comparisons.

M&A firm newsletters

Some mergers and acquisitions firms publish newsletters that will describe the kind of multiples being paid on deals they have done. For example, when I was preparing to sell my conference business, I looked at the newsletter from the Jordan Edmiston Group, one of the top M&A firms in the conference business.

I found that the problem with the M&A firms as a source for valuation data is that they tend to overemphasize their biggest deals. M&A firms get paid on deal size and spend a lot of their time trying to convince the world (and prospective sellers) they do big deals. It’s also the way they measure themselves and earn bragging rights over cocktails. Unfortunately, it ensures they (and their newsletters) boast about the one deal they did with a valuation of $100 million instead of the 15 deals they did for businesses worth less than $20 million.

Bizbuysell.com

Bizbuysell.com is the largest online marketplace for businesses for sale. I think of it as an eBay for businesses. If you own a dry cleaning shop in Seattle, you can advertise it on bizbuysell.com. Likewise, if you want to buy a retail business in Nashville, you can query bizbuysell.com by industry and identify businesses that meet your specs.

The downside of bizbuysell.com is that it tends to attract smaller, main street businesses—which is great if you own a coffee shop or lawn maintenance business, not as helpful if you own a larger, unique business.

In the end, I have found using all four of these sources usually enables me to estimate a company’s value within 20 percent of the final selling price. Not perfect, but a lot more accurate than looking at what billion dollar public companies trade for on the stock exchange.

http://www.inc.com/guides/2010/10/how-to-value-your-business.html

The Best Investment Advice You Will Ever Get

I’m going to simplify what I consider to be the best investment advice I have ever been given and share it with you. Here you go:

1. If you have any credit card or other type of consumer debt on which you pay 5pct or more interest, pay it off. Compound interest is your enemy. The chances of you earning more on your money than you are paying in consumer interest rates are slim. Pay it off.

2. Cash is King. Now that Madoff is in jail, no investment can offer returns with zero risk. If you don’t fully understand the risks of an investment you are contemplating, it’s ok to do nothing. In times of massive uncertainty like we are facing today, doing nothing is a valid and IMHO preferable investment strategy. Just put your money in the bank.

3. Cash Creates Transactional Returns. What does this mean ? It means that you should analyze what you spend money on over the course of a year. You will get a better return on your money by being a smart shopper and taking advantage of cash, quantity or other types of discounts than you will in the stock market. Saving 15pct on the $1k dollars worth of items you know you will absolutely spend money on is a better return on your money than making 15pct in a year on a $1k investment because you don’t pay taxes on it.

If you have under 100k dollars in liquid assets, your net worth will be higher in one year if you follow this advice than if you follow ANY other investment advice any broker or banker will give you this year.

http://blogmaverick.com/2010/08/25/the-best-investment-advice-you-will-ever-get/

10 Money Moves That Will Always Pay Off

Few things in life are guaranteed. When it comes to money, even fewer.

But these are nervous times. The stock market is swaying like a drunk debutante. The economy is wobbly. Who can trust anything any more? Most people are hard-pressed, nervous and unsure of what to do.

Relax. Here are 10 sure-fire money ideas.

Guaranteed.

1. Max that 401(k)

This is a slam dunk for you. Every dollar you invest saves you money on taxes because it comes off your taxable income. So Uncle Sam is effectively chipping in.

The money can then grow each year, free of any state or federal tax on the interest or capital gains (though when you withdraw your money in retirement it will be taxable income).

Even better: Many companies offer to chip in as well, up to a certain level, by matching contributions with money of their own.

2. Give up the vacation home

Sorry to be a spoilsport. But the finances just don't stack up. The math on most vacation homes -- unless it's dirt cheap, or so near that you go there most weekends -- is terrible. Most of the time we use them for a few weeks or months of the year. They cost money to buy. There are annual upkeep, maintenance, condo fees and taxes.

How much has the house risen in value since you bought it? How much do you expect it to rise? A home probably has to rise by maybe 7% a year, on average, to cover the costs. Sure, keep it if you want to and can afford to. But if you are looking for a quick financial win, this is one.

3. Put $5,000 into an individual retirement account or Roth IRA tax shelter

If you're over 50, put in $6,000. And make sure your spouse does too. IRAs are a great deal. A regular IRA works much like a 401(k) -- your contribution cuts your taxable income, and grows tax-free inside the shelter, but it's taxable income when you take it out. In a Roth, you contribute after-tax dollars, but then it's tax-free forever.

In the past, these were limited to those making less than, roughly, $100,000 to $160,000 a year, but as of this year there's a special deal. Anyone can contribute to a Roth, by contributing to a traditional IRA and then converting it to a Roth. You can also convert your IRA savings from previous years (Note: there will be tax to pay).

4. Pay off your credit-card debt

Haven't you heard? If you're still carrying a balance each month, this is a quick win. Eat macaroni and cheese for three months if you have to, but pay off those balances. You're probably paying at least 15% interest. You may be paying a lot more. You'd have to earn maybe 17% before tax on an investment just to keep pace. Boring? Nobody's making 17% these days. So pay off your credit-card debt and brag to all your friends that you just beat Wall Street.

5. Fire your banker

This isn't just good financial sense -- it's fun, too. If you're like most people, you're probably paying hundreds of dollars a year in account service fees, ATM charges for access to your own money and the like.

Banks need to sock you with these fees to pay for all their overpriced and useless overhead, like the expensive marketing campaigns and the executives. Fire them all. Chances are you have a local community bank, savings and loan, or credit union that will do the job of looking after your cash for a lot less. It's Uncle Sam, not the institution, that guarantees your money anyway.

6. Get your tax refund early

How? By not overpaying your taxes in the first place. Every year, millions of people cheer when they get a check back from Uncle Sam. But that just means they paid too much withholding tax during the year. So Uncle Sam got an interest-free loan. Good for him, not so good for you.

Go to your employer's payroll department and file a new W-4 form and raise your number of allowances. You'll see extra money in your paycheck straight away.

The average tax rebate is nearly $3,000, according to the Internal Revenue Service. The average credit-card balance? Also about $3,000, according the Federal Reserve. Borrowing from a bank at 15% and lending the money to Uncle Sam for free is no way to run your finances.

7. Buy inflation-protected bonds

Treasury inflation-protected securities, or TIPS, aren't sexy. They won't make you rich. But they're guaranteed -- twice over.

They're issued by the U.S. government, so they are guaranteed against default. And they are protected against inflation because coupons and principal will adjust to reflect it. Right now a long-term TIPS bond will guarantee you an interest rate of about 1.8% a year above inflation. (Note: Hold them in a tax-sheltered account as they are highly susceptible to taxes).

Dull, maybe. But a sure thing.

8. Buy a bread machine

You want a certain winner? If a $50 breadmaker saves you, say, $7 a week on buying bread, that's $350 year. The easiest dough you'll make. Modern breadmakers are, well, a piece of cake to operate. The return on investment: 600% in year one and 700% after that.

Wall Street's best year ever? Just 74%, in 1915. Ha. Amateurs.

9. Play hardball with your insurance company

Call competitors and ask them to quote you prices for your current house and auto policies. You'll be amazed at the differences. Prices for the same policy can vary as much as 50% between carriers. And there's little rhyme or reason to it.

While you're about it, ask about raising your deductibles too. This can be a quick win: Raising your deductible by $500 to $1,000 can cut hundreds off your annual premiums.

10. Get a freebie from a bank

Why not? You bailed them out. I'm not just talking about stopping in for a free lollipop or cup of coffee (though my local Bank of America brews an OK cup).

Sign up for a credit card with a big bonus -- like a free air ticket or weekend hotel stay. Use the card enough to qualify. Then cancel the card.

No, it's not quite that easy. You have to double-check the fine print first. You'll sit on hold for half an hour when you try to cancel. And if you did this too often it might affect your credit score. But where else can you get a free (or nearly free) air ticket?

http://finance.yahoo.com/retirement/article/110423/10-money-moves-that-will-always-pay-off?mod=retire-planning

But Will It Make You Happy?

She had so much.

A two-bedroom apartment. Two cars. Enough wedding china to serve two dozen people.

Yet Tammy Strobel wasn't happy. Working as a project manager with an investment management firm in Davis, Calif., and making about $40,000 a year, she was, as she put it, caught in the "work-spend treadmill."

So one day she stepped off.

Inspired by books and blog entries about living simply, Ms. Strobel and her husband, Logan Smith, both 31, began donating some of their belongings to charity. As the months passed, out went stacks of sweaters, shoes, books, pots and pans, even the television after a trial separation during which it was relegated to a closet. Eventually, they got rid of their cars, too. Emboldened by a Web site that challenges consumers to live with just 100 personal items, Ms. Strobel winnowed down her wardrobe and toiletries to precisely that number.

Her mother called her crazy.

Today, three years after Ms. Strobel and Mr. Smith began downsizing, they live in Portland, Ore., in a spare, 400-square-foot studio with a nice-sized kitchen. Mr. Smith is completing a doctorate in physiology; Ms. Strobel happily works from home as a Web designer and freelance writer. She owns four plates, three pairs of shoes and two pots. With Mr. Smith in his final weeks of school, Ms. Strobel's income of about $24,000 a year covers their bills. They are still car-free but have bikes. One other thing they no longer have: $30,000 of debt.

Ms. Strobel's mother is impressed. Now the couple have money to travel and to contribute to the education funds of nieces and nephews. And because their debt is paid off, Ms. Strobel works fewer hours, giving her time to be outdoors, and to volunteer, which she does about four hours a week for a nonprofit outreach program called Living Yoga.

"The idea that you need to go bigger to be happy is false," she says. "I really believe that the acquisition of material goods doesn't bring about happiness."

While Ms. Strobel and her husband overhauled their spending habits before the recession, legions of other consumers have since had to reconsider their own lifestyles, bringing a major shift in the nation's consumption patterns.

"We're moving from a conspicuous consumption — which is 'buy without regard' — to a calculated consumption," says Marshal Cohen, an analyst at the NPD Group, the retailing research and consulting firm.

Amid weak job and housing markets, consumers are saving more and spending less than they have in decades, and industry professionals expect that trend to continue. Consumers saved 6.4 percent of their after-tax income in June, according to a new government report. Before the recession, the rate was 1 to 2 percent for many years. In June, consumer spending and personal incomes were essentially flat compared with May, suggesting that the American economy, as dependent as it is on shoppers opening their wallets and purses, isn't likely to rebound anytime soon.

On the bright side, the practices that consumers have adopted in response to the economic crisis ultimately could — as a raft of new research suggests — make them happier. New studies of consumption and happiness show, for instance, that people are happier when they spend money on experiences instead of material objects, when they relish what they plan to buy long before they buy it, and when they stop trying to outdo the Joneses.

If consumers end up sticking with their newfound spending habits, some tactics that retailers and marketers began deploying during the recession could become lasting business strategies. Among those strategies are proffering merchandise that makes being at home more entertaining and trying to make consumers feel special by giving them access to exclusive events and more personal customer service.

While the current round of stinginess may simply be a response to the economic downturn, some analysts say consumers may also be permanently adjusting their spending based on what they've discovered about what truly makes them happy or fulfilled.

"This actually is a topic that hasn't been researched very much until recently," says Elizabeth W. Dunn, an associate professor in the psychology department at the University of British Columbia, who is at the forefront of research on consumption and happiness. "There's massive literature on income and happiness. It's amazing how little there is on how to spend your money."

Conspicuous consumption has been an object of fascination going back at least as far as 1899, when the economist Thorstein Veblen published "The Theory of the Leisure Class," a book that analyzed, in part, how people spent their money in order to demonstrate their social status.

And it's been a truism for eons that extra cash always makes life a little easier. Studies over the last few decades have shown that money, up to a certain point, makes people happier because it lets them meet basic needs. The latest round of research is, for lack of a better term, all about emotional efficiency: how to reap the most happiness for your dollar.

So just where does happiness reside for consumers? Scholars and researchers haven't determined whether Armani will put a bigger smile on your face than Dolce & Gabbana. But they have found that our types of purchases, their size and frequency, and even the timing of the spending all affect long-term happiness.

One major finding is that spending money for an experience — concert tickets, French lessons, sushi-rolling classes, a hotel room in Monaco — produces longer-lasting satisfaction than spending money on plain old stuff.

"It's better to go on a vacation than buy a new couch' is basically the idea," says Professor Dunn, summing up research by two fellow psychologists, Leaf Van Boven and Thomas Gilovich. Her own take on the subject is in a paper she wrote with colleagues at Harvard and the University of Virginia: "If Money Doesn't Make You Happy Then You Probably Aren't Spending It Right." (The Journal of Consumer Psychology plans to publish it in a coming issue.)

Thomas DeLeire, an associate professor of public affairs, population, health and economics at the University of Wisconsin in Madison, recently published research examining nine major categories of consumption. He discovered that the only category to be positively related to happiness was leisure: vacations, entertainment, sports and equipment like golf clubs and fishing poles.

Using data from a study by the National Institute on Aging, Professor DeLeire compared the happiness derived from different levels of spending to the happiness people get from being married. (Studies have shown that marriage increases happiness.)

"A $20,000 increase in spending on leisure was roughly equivalent to the happiness boost one gets from marriage," he said, adding that spending on leisure activities appeared to make people less lonely and increased their interactions with others.

According to retailers and analysts, consumers have gravitated more toward experiences than possessions over the last couple of years, opting to use their extra cash for nights at home with family, watching movies and playing games — or for "staycations" in the backyard. Many retailing professionals think this is not a fad, but rather "the new normal."

"I think many of these changes are permanent changes," says Jennifer Black, president of the retailing research company Jennifer Black & Associates and a member of the Governor's Council of Economic Advisors in Oregon. "I think people are realizing they don't need what they had. They're more interested in creating memories."

She largely attributes this to baby boomers' continuing concerns about the job market and their ability to send their children to college. While they will still spend, they will spend less, she said, having reset their priorities.

While it is unlikely that most consumers will downsize as much as Ms. Strobel did, many have been, well, happily surprised by the pleasures of living a little more simply. The Boston Consulting Group said in a June report that recession anxiety had prompted a "back-to-basics movement," with things like home and family increasing in importance over the last two years, while things like luxury and status have declined.

"There's been an emotional rebirth connected to acquiring things that's really come out of this recession," says Wendy Liebmann, chief executive of WSL Strategic Retail, a marketing consulting firm that works with manufacturers and retailers. "We hear people talking about the desire not to lose that — that connection, the moment, the family, the experience."

Current research suggests that, unlike consumption of material goods, spending on leisure and services typically strengthens social bonds, which in turn helps amplify happiness. (Academics are already in broad agreement that there is a strong correlation between the quality of people's relationships and their happiness; hence, anything that promotes stronger social bonds has a good chance of making us feel all warm and fuzzy.)

And the creation of complex, sophisticated relationships is a rare thing in the world. As Professor Dunn and her colleagues Daniel T. Gilbert and Timothy D. Wilson point out in their forthcoming paper, only termites, naked mole rats and certain insects like ants and bees construct social networks as complex as those of human beings. In that elite little club, humans are the only ones who shop.

AT the height of the recession in 2008, Wal-Mart Stores (NYSE: WMT - News) realized that consumers were "cocooning" — vacationing in their yards, eating more dinners at home, organizing family game nights. So it responded by grouping items in its stores that would turn any den into an at-home movie theater or transform a backyard into a slice of the Catskills. Wal-Mart wasn't just selling barbecues and board games. It was selling experiences.

"We spend a lot of time listening to our customers," says Amy Lester, a spokeswoman for Wal-Mart, "and know that they have a set amount to spend and need to juggle to meet that amount."

One reason that paying for experiences gives us longer-lasting happiness is that we can reminisce about them, researchers say. That's true for even the most middling of experiences. That trip to Rome during which you waited in endless lines, broke your camera and argued with your spouse will typically be airbrushed with "rosy recollection," says Sonja Lyubomirsky, a psychology professor at the University of California, Riverside.

Professor Lyubomirsky has a grant from the National Institute of Mental Health to conduct research on the possibility of permanently increasing happiness. "Trips aren't all perfect," she notes, "but we remember them as perfect."

Another reason that scholars contend that experiences provide a bigger pop than things is that they can't be absorbed in one gulp — it takes more time to adapt to them and engage with them than it does to put on a new leather jacket or turn on that shiny flat-screen TV.

"We buy a new house, we get accustomed to it," says Professor Lyubomirsky, who studies what psychologists call "hedonic adaptation," a phenomenon in which people quickly become used to changes, great or terrible, in order to maintain a stable level of happiness.

Over time, that means the buzz from a new purchase is pushed toward the emotional norm.

"We stop getting pleasure from it," she says.

And then, of course, we buy new things.

When Ed Diener, a psychology professor at the University of Illinois and a former president of the International Positive Psychology Association — which promotes the study of what lets people lead fulfilling lives — was house-hunting with his wife, they saw several homes with features they liked.

But unlike couples who choose a house because of its open floor plan, fancy kitchens, great light, or spacious bedrooms, Professor Diener arrived at his decision after considering hedonic-adaptation research.

"One home was close to hiking trails, making going hiking very easy," he said in an e-mail. "Thinking about the research, I argued that the hiking trails could be a factor contributing to our happiness, and we should worry less about things like how pretty the kitchen floor is or whether the sinks are fancy. We bought the home near the hiking trail and it has been great, and we haven't tired of this feature because we take a walk four or five days a week."

Scholars have discovered that one way consumers combat hedonic adaptation is to buy many small pleasures instead of one big one. Instead of a new Jaguar, Professor Lyubomirsky advises, buy a massage once a week, have lots of fresh flowers delivered and make phone calls to friends in Europe. Instead of a two-week long vacation, take a few three-day weekends.

"We do adapt to the little things," she says, "but because there's so many, it will take longer."

Before credit cards and cellphones enabled consumers to have almost anything they wanted at any time, the experience of shopping was richer, says Ms. Liebmann of WSL Strategic Retail. "You saved for it, you anticipated it," she says.

In other words, waiting for something and working hard to get it made it feel more valuable and more stimulating.

In fact, scholars have found that anticipation increases happiness. Considering buying an iPad? You might want to think about it as long as possible before taking one home. Likewise about a Caribbean escape: you'll get more pleasure if you book a flight in advance than if you book it at the last minute.

Once upon a time, with roots that go back to medieval marketplaces featuring stalls that functioned as stores, shopping offered a way to connect socially, as Ms. Liebmann and others have pointed out. But over the last decade, retailing came to be about one thing: unbridled acquisition, epitomized by big-box stores where the mantra was "stack 'em high and let 'em fly" and online transactions that required no social interaction at all — you didn't even have to leave your home.

The recession, however, may force retailers to become reacquainted with shopping's historical roots.

"I think there's a real opportunity in retail to be able to romance the experience again," says Ms. Liebmann. "Retailers are going to have to work very hard to create that emotional feeling again. And it can't just be 'Here's another thing to buy.' It has to have a real sense of experience to it."

Industry professionals say they have difficulty identifying any retailer that is managing to do this well today, with one notable exception: Apple (NasdaqGS: AAPL - News), which offers an interactive retail experience, including classes.

Marie Driscoll, head of the retailing group at Standard & Poor's, says chains have to adapt to new consumer preferences by offering better service, special events and access to designers. Analysts at the Boston Consulting Group advise that companies offer more affordable indulgences, like video games that provide an at-home workout for far less than the cost of a gym membership.

Mr. Cohen of the NPD Group says some companies are doing this. Best Buy (NYSE: BBY - News) is promoting its Geek Squad, promising shoppers before they buy that complicated electronic thingamajig that its employees will hold their hands through the installation process and beyond.

"Nowadays with the economic climate, customers definitely are going for a quality experience," says Nick DeVita, a home entertainment adviser with the Geek Squad. "If they're going to spend their money, they want to make sure it's for the right thing, the right service."

With competition for consumer dollars fiercer than it's been in decades, retailers have had to make the shopping experience more compelling. Mr. Cohen says automakers are offering 30-day test drives, while some clothing stores are promising free personal shoppers. Malls are providing day care while parents shop. Even on the Web, retailers are connecting on customers on Facebook, Twitter and Foursquare, hoping to win their loyalty by offering discounts and invitations to special events.

For the last four years, Roko Belic, a Los Angeles filmmaker, has been traveling the world making a documentary called "Happy." Since beginning work on the film, he has moved to a beach in Malibu from his house in the San Francisco suburbs.

San Francisco was nice, but he couldn't surf there.

"I moved to a trailer park," says Mr. Belic, "which is the first real community that I've lived in in my life." Now he surfs three or four times a week. "It definitely has made me happier," he says. "The things we are trained to think make us happy, like having a new car every couple of years and buying the latest fashions, don't make us happy."

Mr. Belic says his documentary shows that "the one single trait that's common among every single person who is happy is strong relationships."

Buying luxury goods, conversely, tends to be an endless cycle of one-upmanship, in which the neighbors have a fancy new car and — bingo! — now you want one, too, scholars say. A study published in June in Psychological Science by Ms. Dunn and others found that wealth interfered with people's ability to savor positive emotions and experiences, because having an embarrassment of riches reduced the ability to reap enjoyment from life's smaller everyday pleasures, like eating a chocolate bar.

Alternatively, spending money on an event, like camping or a wine tasting with friends, leaves people less likely to compare their experiences with those of others — and, therefore, happier.

Of course, some fashion lovers beg to differ. For many people, clothes will never be more than utilitarian. But for a certain segment of the population, clothes are an art form, a means of self-expression, a way for families to pass down memories through generations. For them, studies concluding that people eventually stop deriving pleasure from material things don't ring true.

"No way," says Hayley Corwick, who writes the popular fashion blog Madison Avenue Spy. "I could pull out things from my closet that I bought when I was 17 that I still love."

She rejects the idea that happiness has to be an either-or proposition. Some days, you want a trip, she says; other days, you want a Tom Ford handbag.

Ms. Strobel — our heroine who moved into the 400-square foot apartment — is now an advocate of simple living, writing in her spare time about her own life choices at Rowdykittens.com.

"My lifestyle now would not be possible if I still had a huge two-bedroom apartment filled to the gills with stuff, two cars, and 30 grand in debt," she says.

"Give away some of your stuff," she advises. "See how it feels."

http://finance.yahoo.com/family-home/article/110275/but-will-it-make-you-happy