MONEY Financial Planning

Two Founding Fathers Who Died Broke and One Who Retired Early

What can the men who adorn our currency teach us about our own finances?

In theory, the founding fathers should be the ultimate financial role models. After all, they’re literally on the money. Warren Buffett might be every investor’s hero, but even he can’t count his earnings without seeing the faces of Washington, Hamilton, Franklin, and Jefferson. Even John Adams, perhaps the most neglected of the founding fathers, has been commemorated on the dollar coin.

What can the men who adorn our currency teach us about our own finances? Quite a lot, actually, but not because they were all as good with money as they were at creating a nation. Jefferson, for example, amassed a great fortune but later squandered it and ended his life all but penniless (despite, of course, the economic advantages of being a slaveholder). But others, including Washington — a shrewd and even ruthless businessman — died very wealthy men.

Read the full text here.

MONEY Greece

How Investors Should React to the Greek Crisis

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Louisa Gouliamaki—AFP/Getty Images The Greek economic crisis isn't ending anytime soon.

Step one: Don't panic.

Even from afar, it’s hard for U.S. investors to ignore the Greek economic crisis, which continues to roil global markets.

After Greece saw its bailout funds expire Tuesday—and became the first developed country to fail to pay back a loan from the International Monetary Fund—Greek prime minister Alexis Tsipras sent a letter offering concessions to European creditors in hopes that a new agreement might help the country remain afloat.

The fate of the Greek economy depends in large part on whether its government can quickly make a deal with European leaders.

One point of tension: Leaders in Germany, Greece’s biggest creditor, are insisting that the country accept additional austerity measures like pension cuts before it can get more emergency funds. Though a compromise could be reached this week, the worst case scenario is that Greece would continue to miss debt payments and, eventually, be forced out of the euro currency. Doing so would allow Greece to pursue its own fiscal and monetary policies in pursuit of economic recovery.

But what would that mean for investors around the world? The short answer, assuming you have a fairly diversified portfolio of stocks and bonds, is that it probably wouldn’t have a dramatic long-term effect.

Here’s why: If you look at the kind of target-date mutual funds that are popular compenents of many American retirement accounts, like 401(k)s—the Vanguard Target Retirement 2035, for example—about a third of their holdings are in foreign stocks. And of those foreign stocks, only a small fraction tend to be Greek companies. The Vanguard Total International Stock (which the 2035 fund holds), for example, has only about 0.07% of assets in Greek companies. So not a lot of direct impact.

The indirect impact is also likely to be muted. More than 45% of the holdings in Vanguard Total International Stock are in European countries—and if Greece leaves the Eurozone, that could affect companies and markets throughout the Continent. But some analysts are arguing that the market has already reacted, and perhaps even over-reacted, to the possibility of a so-called Grexit. “You have to assume that a substantial amount of the correction is priced in,” Lawrence McDonald, head of U.S. macro strategy at Societe Generale, recently told MarketWatch.

That being said, a note of caution ought to be sounded about the dollar. If the Greek crisis isn’t resolved quickly, it could lead to a flight to safety away from the euro and toward the U.S. dollar. The dollar’s strength has already led to sluggish profit growth in the U.S. In the past few months, the euro has rebounded a bit. But the euro could weaken again if crisis persists in Greece, putting U.S. companies that sell their goods abroad in a tough spot.

Still, even if you believe things in Greece will get worse before they get better, history suggests you’d be unwise to pull much of your money from the market right now. Though we could be in for more bad news and some painful market gyrations in the near term, keeping your money invested and sticking to your long-term strategy will likely pay off in the end—no matter what happens in Greece. Plus, there’s potentially good news for bond investors: If fear of European instability drives investors to seek out safe assets like U.S. Treasuries, then many bond funds will do well.

MONEY consumer psychology

5 Foolish Money Myths You Can Stop Believing Right Now

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lina aidukaite—Getty Images

Drink your latte.

Whether you think of yourself as money-savvy or you’re acutely aware of where your personal-finance knowledge is lacking, it’s always good to make sure you aren’t managing your money on assumptions that are faulty to begin with.

Here are a few common money myths to kick to the curb.

Myth No. 1: Credit cards are evil

With the average credit card debt sitting at just over $15,000 per household, it’s easy to think that plastic is the irresponsible way to pay. Not so fast.

It’s not the method of payment that’s the problem; in fact, having credit cards can actually help your credit score. A full 10% of your credit score depends upon having a mix of credit types — installment credit, like a car loan, and revolving credit, like credit cards.

In addition, credit cards offer more security than any other form of payment, allowing you to dispute fraudulent activity without footing the bill.

Myth No. 2: Skipping your morning coffee will make you rich

Cutting back on small expenses might offer some breathing room in your budget over the long term, but money not spent doesn’t necessarily equal money saved. To grow that money, it would need to be put into a place where growth can occur — like an investment account or, at the bare minimum, a savings account.

You may think cutting out a daily expenditure is putting you on a path to financial independence, but that’s only step one.

Myth No. 3: It’s too risky to invest your money

The truth opposing this myth is simple — it’s too risky to not invest your money.

If you’re already diligent about socking away money each month, that’s a great start. But with interest rates sitting so low, money put into a savings account will likely lose more to inflation than it can make up in growth. That’s where investing comes in.

Through the power of compounding, a single $500 investment made at the age of 20 earning a conservative 5% return would be $4,492.50 at the age of 65. Imagine that scenario with ongoing contributions and larger returns. It would put any savings account to shame.

Myth No. 4: All debt should be paid before saving

Unfortunately, emergencies and unexpected expenses occur at all stages of life — even when you’re working to pay off student loans or crawl out from underneath credit card debt.

A study recently released by Bankrate found that 60% of Americans wouldn’t have the funds available to cover even small hiccups — like a $500 medical bill or car repair. Think about how many of those expenses you’ve run into in the last six to 12 months; probably at least one.

If you want to avoid incurring more debt as a result of life’s curveballs, work to save while paying off debt. This will give you a better chance of smooth sailing to the finish line.

Myth No. 5: You should borrow the most money offered to you

Wondering how much house you can afford? Don’t let the loan amount offered by the bank be your guiding light.

Those in the business of making loans are incentivized to offer the biggest loan possible that you’ll be approved for. So while they may be checking out your debt-to-income ratio, this simple equation doesn’t always offer an accurate snapshot of what you can actually manage to pay each month.

The same goes for credit card limits — having a $20,000 limit doesn’t mean your finances can easily handle paying back $20,000 worth of purchases.

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MONEY consumer psychology

How Your Money Beliefs Are Hurting You

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Barbara Taeger Photography—Getty Images

We make things up about money and believe them.

What you believe about money drives your financial behavior. Finding out your beliefs is a key step to solving various problems, such as money conflicts in relationships.

Money doesn’t actually exist in reality. It isn’t gold or bank account balance or the pieces of paper in our wallet — it’s this conceptual thing, a promise, an agreement, delivered in measurable units, which we later exchange for something we want.

To grapple with this concept, we make things up about money and believe them. These beliefs act like a kind of programming language, which I call Money Operating Systems.

Your Money OS is a very basic belief about money that influences all your financial behavior. This system you install, unwittingly, controls how much you save and spend, whether you invest, how you invest, how you negotiate for a salary and how you feel about all of that.

Your past experiences with money, starting with your early memories of it, created your Money OS. It also came from your parents or the environment you were raised in.

Recognizing your belief helps you tackle your money woes, or those with your partner. Here are five of the Money Operating Systems I see most frequently:

  1. “There will always be enough money.” People with this belief can be high earners, but sometimes they’re average earners who just live a simple lifestyle. If you have this belief about money, you need to be careful. Make sure you understand how much money you need for your financial future. Over-optimism causes under-saving.
  2. “If I am good, the universe will give me what I need.” A positive world outlook doesn’t lead to productive financial behavior. Saving and investing rarely happen, because these folks believe that their financial health is a function of virtuousness.
  3. “Money makes me valuable.” They are often the people who drive the big flashy cars, and they work to have other people perceive them as successful. Money intertwines with their self-worth. Their ego grows with their bank account. But if they are unsuccessful, their confidence suffers.
  4. “There will never be enough money.” This one is pretty self-explanatory, and very common. People with this money belief will be either over-spenders or under-earners, and they keep creating the circumstances to prove this outlook true. They may justify holding on to poorly paid positions or overspending their high income.
  5. “Money is bad, the root of all evil.” These people believe that business and capitalism are responsible for social ills. They often righteously live without a lot of material possessions. Their negative opinion of money usually leads to destructive financial behavior.

These are only some of the beliefs that determine what is possible in your financial life. It took me some time to be analytical about my own money. I recognized my own system and how it kept me locked in cycles of overspending and feelings of worthlessness, and I’ve since transformed my experiences with money.

So where do you begin to see yourself here? What about your honey?

Hilary Hendershott, MBA, CFP, is founder and Chief Executive of Silicon Valley-based Hilary Hendershott Financial.

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TIME Investing

Here’s How Much Carl Icahn Made On His Netflix Investment

CNBC Events - Season 2014
CNBC—NBCU Photo Bank via Getty Images CNBC's Scott Wapner interviews Carl Icahn, Chairman, Icahn Enterprises at the CNBC Institutional Investor Delivering Alpha Conference in New York.

He received an awfully lovely parting gift

Carl Icahn tweeted on Wednesday that he was out of Netflix. He received an awfully lovely parting gift.

The famed investor made a reported $2 billion on his investment in the online streaming service. After announcing a 7-for-1 stock split on Tuesday, Netflix stock reached a record high Wednesday just before Icahn sold the last of his shares.

Icahn became one of Netflix’s largest shareholders in 2012 after taking a 10% stake at $58 per share. He acquired the stock with the expectation that the company would soon be acquired. Icahn’s prediction was wrong but the trade still paid off. Since the fall of 2012, Netflix’s stock has spiked more than 12-fold and has nearly doubled in this year alone.

[Business Insider]

MONEY real estate

This Problem Is Unexpectedly Crushing Many Retirement Dreams

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Peter Goldberg—Getty Images

Housing is most Americans' most important source of retirement security. So a sharp reduction in the rate of ownership, coupled with rising rents, is taking a toll.

The housing bust of 2008 touched every homeowner. The subsequent recovery has been selective, mainly benefiting those with the resources and credit to invest. This has had a more damaging effect on individuals’ retirement security than many might expect.

For a quarter century, home equity has been the largest single source of wealth for all but the richest households nearing retirement age, accounting for 44% of net worth in the 1990s and 35% today, new research shows. The home equity percentage of net worth is greatest among homeowners with the least wealth, reaching 50% for those with median net worth of $42,460, according to a report from The Hamilton Project, a think tank closely affiliated with the Brookings Institution.

By comparison, the share of net worth in retirement accounts is just 33% for all but the wealthiest households, a figure that drops to 21% for low-wealth households. So a housing recovery that leaves out low-income families is especially damaging to the nation’s retirement security as a whole.

There can be little doubt that low-income households largely have missed the housing recovery. Homeownership in the U.S. has been falling for eight years, down to 63.7% in the first quarter from a peak of over 69% in 2004, according to a report from Harvard University’s Joint Center for Housing Studies. Former homeowners are now renters, frozen out of the market by their own poor credit and stricter lending standards.

Meanwhile, rents are rising, taking an additional toll on many Americans’ ability to save for retirement. On average, the number of new rental households has increased by 770,000 annually since 2004, making 2004 to 2014 the strongest 10-year stretch of rental growth since the late 1980s.

The uneven housing recovery is contributing to an expanding wealth gap, the report suggests. Among households near retirement age, those in the top half of the net worth spectrum had more wealth in 2013, adjusted for inflation, than the top half in 1989. Those in the bottom half had less wealth.

Housing is by no means the only concern registered in the report. Much of what researchers point to is fairly well known: Only half of working Americans expect to have enough money to live comfortably in retirement; longevity is putting a strain on retirement resources; half of American seniors will pay out-of-pocket expenses for long-term services and supports; the percentage of dedicated retirement assets in traditional defined-benefit plans has shrunk from two-thirds in 1978 to one third today.

All of this diminishes retirement security. Individuals must adapt, and with so much riding on our personal ability to manage our own financial affairs it is surprising that the report goes to some lengths to play down the importance of what has blossomed into a broad financial education effort in the U.S.

Financial acumen is generally lacking among Americans and, for that matter, most of the world. Just half of pre-retirees, and far fewer younger folks, can correctly answer three basic questions about inflation, compound growth, and diversification, according one often-cited study. Yet researchers at The Hamilton Project assert that it is an “open question” as to whether public resources should be spent on educational efforts, citing evidence of its effectiveness as “underwhelming.”

I have argued that we cannot afford not to spend money on this effort. Yet I also understand the benefits of promoting things like automatic enrollment into 401(k) plans and automatic escalation of contributions, which The Hamilton Project seems to prefer. The truth is we need to do all of it, and more.

TIME Markets

Why Biotech Stocks Are So Wildly Unpredictable

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Jean-Christophe Verhaegen—AFP/Getty Images A photo taken on November 27, 2012 shows a sample of a plant before a biochemical analysis at the INRA Nancy (National Institute of Agronomic Research) in Champenoux.

Where there's growth, there's instability

To understand why some investors are growing nervous about the biotech sector, consider the recent IPO of Axovant Sciences. The company was founded last October, isn’t profitable, and has already racked up a $21 million loss. Its CEO has much more experience with hedge funds than he does with biotech startups. Axovant has only one product candidate, an Alzheimer drug it bought from GlaxoSmithKline last December after it was tested on 1,250 patients in 13 trials and then stalled in development.

Two weeks ago, Axovant went public in an offering that raised $315 million. Axovant, which paid $5 million for the Alzheimer’s drug, says it needs the cash because it will have to pay Glaxo as much as $160 million more if the drug makes it to market. Incredibly, the stock doubled on its first day to $31 a share, but has since fallen by nearly a third of that peak value.

And it could well fall further. But that’s not what worries longtime observers of the biotech sector. The real fear is that this kind of speculative behavior among investors is all too familiar from the biotech and dot-com bubbles of 2000.

“The fact that someone can make something of this size out of virtually nothing should be of concern to everyone in the industry,” Fierce Biotech editor John Carroll wrote about the Axovant IPO. “When biotech mania takes over and perfectly legal schemes like this rain money, the pitfalls start to look like the Grand Canyon.”

Of the 129 biotech companies that have gone public since early 2013, few are as speculative as Axovant. Many, though, have recently gone public with huge losses incurred by heavy spending on the development of drugs that may or may not find approval from U.S. and foreign regulators. Even those that do may be so specialized in the diseases they treat that they may not become blockbusters.

If the party in biotech stocks is over, a lot of investors don’t seem to have gotten the message. The S&P 500 Biotech Index has nearly tripled in the past three years. The index had stalled and moved sideway for much of the past spring, leading some to wonder whether the rally was spent. Instead, it’s gained another 11.3% over the past month. The Nasdaq Composite, by contrast, is up only 2.5%.

Several factors have been fueling the biotech rally of the past three years. For one thing, the U.S. Food and Drug Administration has been pushing to speed up approvals. According to Ernst & Young, the FDA approved 41 new drugs in 2014, up from 27 a year earlier.

Meanwhile, the genomics-based insights that emerged in the early 2000s are finally delivering on new drug therapies. That in turn has led biotech firms to increase their research and development spending by 20% a year. After a decade or more of few promising drugs, the new generation is finally bearing financial fruit. Revenue at U.S. and European biotech firms rose 24% last year, while net income rose 231%, Ernst & Young reckons.

While new drugs may continue to come through the drug pipeline, the risk is they won’t benefit any and all biotech firms, but rather a select few. In the meantime, more investor cash is pouring into the sector indiscriminately, even into more questionable startups like Axovant. Some investors suggest it’s safer to stick with the larger companies – the so-called Big Biotech firms – that have a few promising drugs in the works as well as a track record of high growth.

Biotech stocks are vexing for many individual investors because, more than Internet or other tech stocks, they involve arcane science, a long and complex approval process, and a business model that involves largely hit-or-miss products. At the same time, no one wants to sit on the sidelines while a stock – let alone an entire sector – can double in value over the course of a year.

Many individual investors have opted to invest in biotech ETFs and mutual funds. Both of them have outperformed the broader market, but of the two, biotech ETFs have been the stronger performers. The Fidelity Select Biotechnology fund (FBIOX), for example, has risen 27% so far this year, or nearly three times as much as the Nasdaq Composite.

Several ETFs are doing as well or even better. The iShares Nasdaq Biotech ETF (IBB), which tracks biotech stocks on the Nasdaq, is up 26%. The SPDR Biotech ETF (XBI), which tracks the S&P Biotech Index, is up 39%. And the ALPS Medical Breakthrough ETF (SBIO), which began trading in early 2015, is up 47%.

The XBI and SBIO funds have outperformed because they focus more on small and mid-sized biotech companies. Nine out of the ten largest holdings in the XBI have risen more than 50% this year, and seven of them have more than doubled.

The IBB, which has emerged as something of a proxy for the industry for many investors, is weighted much more heavily to bigger, more proven biotech companies. Its top ten holdings make up 59% of the ETF’s value, including giants like Gilead Sciences, Biogen and Amgen.

The volatility of small- and mid-sized biotech stocks mean they will fall sharply once the inevitable correction comes, whether they have promising drugs in the works or not. The wildcard in the sector is the possibility of a wave of M&A, which could drive up some stocks. Synageva Biopharma, for example, has risen 140% this month on news of a buyout by a larger biotech firm, Alexion Pharmaceuticals.

But if picking which company has the next blockbuster drug is tough, anticipating the next M&A target is even trickier. And the longer the biotech rally continues, the more important it becomes to pick the winners from the losers. At some point, for the average investors, staying on the sidelines becomes the smarter play.

MONEY consumer psychology

Probability Trumps Predictions When Making Forecasts

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Colin McDonald—Getty Images/Flickr Select

Most of us don't think in probabilities -- but we should.

Statistician Nate Silver correctly predicted the outcome of every state in the 2012 presidential election. It instantly shot him to fame in a field most people associate with the most boring class they ever took. He’s been on The Daily Show twice. He has more than a million Twitter followers.

But the most important part of Silver’s analysis is that he’s not really making predictions. Not in the way most people think of predictions, at least.

You will never hear Silver say, “He is going to win the election.” You might hear him say, “He has a 60% chance of winning,” or “The odds are in her favor.” Pundits make predictions. Nate Silver calculates probabilities.

All probabilities of less than 100% admit a chance of more than one outcome. Silver put a 60% chance of Obama winning Florida in the 2012 election, which, of course, implied a 40% chance that he wouldn’t win. Silver’s pre-election probability map gave Obama the edge. But, had Mitt Romney won the state, it wouldn’t necessarily have meant Silver was wrong. In his book The Signal and the Noise, Silver wrote:

Political partisans may misinterpret the role of uncertainty in a forecast; they will think of it as hedging your bets and building in an excuse for yourself in case you get the prediction wrong. That is not really the idea. If you forecast that a particular incumbent congressman will win his race 90 percent of the time, you’re also forecasting that he should lose it 10 percent of the time. The signature of a good forecast is that each of these probabilities turns out to be about right over the long run … We can perhaps never know the truth with 100 percent certainty, but making correct predictions is the way to tell if we’re getting closer.

What set Silver apart is that he thinks of the world in probabilities, while the punditry crowd of coin-flipping charlatans thinks in black-and-white certainties. His mind is open to a range of potential outcomes before, during, and — most important — after he’s made his forecast. Things might go this way, or they might go that way. He adjusts the odds of certain outcomes when new information arrives. It’s the most effective way to think about the future.

Why don’t more people think like Nate Silver?

Twenty years ago, Berkshire Hathaway vice chairman Charlie Munger gave a talk called The Psychology of Human Misjudgment. He listed 25 biases that lead to bad decisions. One is the “Doubt-Avoidance Tendency,” which he described:

The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision.

It is easy to see how evolution would make animals, over the eons, drift toward such quick elimination of doubt. After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do.

In other words, most of us don’t think in probabilities. It’s natural to quickly seek one answer and commit to it.

If you watch financial TV, or read investing news, you will almost never hear someone say there’s a 55% chance of a recession this year. They say there is going to be a recession this year. Rarely does an analyst say there’s a 60% chance of a bear market this year. They say there is going to be a bear market this year. There’s no room for error. There are no probabilities. People want exact answers, and pundits are happy to oblige.

Consumers of financial news are part of the problem. Not knowing what the future holds is scary. But you don’t gain much confidence hearing someone say there’s a 60% chance of one outcome and a 40% chance of another. We are more likely to listen to a forecaster who uses unwavering confidence to insist they know the future. It’s like warm milk for our fears.

But thinking in certainties is usually a reflection of how you want the world to work, rather than how it actually works. Silver writes:

Acknowledging the real-world uncertainty in [pundits’] forecasts would require them to acknowledge to the imperfections in their theories about how the world was supposed to behave — the last thing that an ideologue wants to do.

If you have a view of the world that says raising taxes will slow the economy, no amount of information will change your mind. You won’t tolerate a claim of an 80% chance a tax cut could slow the economy, because it leaves open the possibility that your entire world view about tax cuts could be wrong.

One of the top reasons investors make mistakes is that the world works in probabilities, but people want to think in certainties. It’s why bear markets surprise people, banks use too much leverage, budget forecasts are always wrong, and most pundits make themselves look like idiots.

As soon as you start thinking probabilities, all kinds of things change. You’ll prepare for risks you disregarded before. You’ll listen to people you disagreed with before. You won’t be surprised when a recession or a bear market that no one predicted occurs. All of this makes you better at handling and navigating the future — which is the point of forecasting in the first place.

Here’s Silver again:

The more eagerly we commit to scrutinizing and testing our theories, the more readily we accept that our knowledge of the world is uncertain, the more willingly we acknowledge that perfect prediction is impossible, the less we will live in fear of our failures, and the more liberty we will have to let our minds flow freely. By knowing more about what we don’t know, we may get a few more predictions right.

Morgan Housel owns shares of Berkshire Hathaway.

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